Three Ways to Limit Overborrowing for Higher Education

The Federal Government Continues to Allow Parents and Students to Overborrow to Pay for College

The federal loan program, originally designed to provide better access to higher education, has made college less affordable, and ushered in an age of overborrowing. Each year, parents and students borrow more than $80 billion from the federal government for higher education. Over the last two decades, loan limits have gone up and the federal government allows students and families to borrow more and more, much of it without ever assessing their ability to repay this debt. The Federal Reserve Bank of New York found much of the increases in loan limits directly translated to tuition increases. And these tuition increases, in turn, are forcing students and families to borrow even more.

Federal Parent loans and federal loans to graduate students are made in virtually unlimited amounts, and without any meaningful assessment of the borrower’s ability to repay them. The impact has been staggering. Today, 3.6 million families owe collectively more than $100 billion in Parent PLUS loans. Federal graduate lending has exploded, adding another $100 billion more to the federal balance sheet, accounting for nearly half of all newly issued federal student loans.

Complex applications for financial aid, and confusion over eligibility for grants and scholarships also  contribute to overborrowing.

Here are three ways to help address overborrowing:

Set Reasonable Limits for Federal Loan Amounts

Graduate and Parent PLUS loans now make up nearly half of all newly issued federal student loans. The government continues to allow parents to overborrow for college, leading to mounting debt, delayed retirement, and possible garnishment of social security benefits.

These programs have been labeled ‘predatory’ from experts on both sides of the aisle, and polling confirms most Americans believe addressing the unlimitednature of federal loan programs will protect students, and make college more affordable.  Putting reasonable limits on these federal loans can  prevent students and parents from borrowing more than they can afford to repay.

Encourage Students to Start with Grants and Scholarships

The Free Application for Federal Student Aid (FAFSA®)* opens the door to more than $100 billion in scholarships, grants, state-based aid, federal student loans and work-study programs each year. Still, roughly 30% of families didn’t apply last academic year, including those from low-income families who would be most eligible for free money like scholarships and grants. Many aren’t applying because they believe their family’s income is too high to receive funds, or they simply lack awareness about the FAFSA.

It’s ’s critical we continue to educate students and families about the importance of completing the FAFSA so they can access free money for college.

Similarly, more than $100 million in scholarships goes unclaimed each year. Too many students and families don’t apply for scholarships thinking they are reserved for top students or athletes, but there are scholarships available for a wide variety of skills and interests. Free resources like Scholly Scholarship Search by Sallie simplifies the process, connecting students and families to scholarships. In addition, Pell Grants, once a cornerstone of college affordability for those who truly needed assistance, haven’t kept pace with rising tuition. They now cover less than 30 percent of the average cost at a four-year public university, down from nearly 80 percent in 1980. What’s more, nearly $4 billion in Pell grants went unclaimed last year. Increasing Pell Grants for those who need the most support is one of the most effective ways to reduce their reliance on borrowing and keep access to college within reach for more students.

Standardize Financial Aid Offers

Financial aid offers too often leave families confused about the true cost of higher education, according to a study by the federal Government Accountability Office (GAO). It found 91% of colleges and universities did not clearly state the net price of college — the amount a student owes after scholarships and grants — in their financial aid offers. 

A standardized, transparent offer that clearly itemizes direct costs and fees would help students and families make informed decisions about which school to attend and how much they’re expecting to pay—ultimately helping to avoid overborrowing.

Without meaningful reform to curb overborrowing, the cost of college will keep rising, another generation of students will keep taking on unaffordable debt, and taxpayers will continue footing the bill. These three reforms are important steps toward helping students and families borrow responsibly, while ensuring access to higher education.

FAFSA is a registered service mark of U.S. Department of Education, Federal Student Aid