Student Loans and their Effects on College Consumption
Peter Comes
Joe Franzwa
Everett Sommer
University of Illinois at Urbana-Champaign
Dr. Mary Arends-Kuenning
ACE 398
Abstract
Student loans are becoming more of a problem for college students across many campuses’ nation wide because of increasing tuition costs and decreasing amounts of grants and scholarships. Data was collected from a campus online survey and focus groups were conducted with University of Illinois Students, both methods focued on student loans and how they affects a college student’s consumption. The results of the research have shown that college students at this university are not worried about their student loans and it does not affect their current consumption greatly, but does affect larger purchase decisions slightly. This finding has shown that college students should possibly be more aware of their student loans while attending college.
Introduction
As tuition has significantly increased over the past 20-30 years, it has become very common for college students to finance their education through loans. Tuition has become so expensive that it has become near impossible for a student to pay for their education by working. As a result, many students graduate college with thousands of dollars of debt waiting to be paid off. Debt from student loans has become a common reality and something students nowadays just accept. People believe that a college education is worth the price tag because it leads to a good job and higher earnings.
The purpose of this research project is to find out more about the connection between student loans and consumption. The research sets out to answer if students spend more or less if they have a loan and their reasoning behind some of their decisions. It is hypothesized that most college students just accept the fact that they are in debt. They do not worry about their loans because they expect to make a decent salary after they graduate and believe they will be able to pay the loans back later in life. In addition, it is expected that students with loans are more likely to be in credit card debt and hold jobs. Regardless of what the data indicates, something needs to be done about the rising cost of tuition. Students also need to be made more aware of the dangers of debt before entering college so they can make better financial decisions.
Literary Review
There is a vast assortment of literature on student loans and debt that particularly emphasize the situations of young people. Anya Kamenetz is the author of “Generation Debt,” a literature work on the debt problems 18-34 year olds face. She goes into detail on how student loans have been and will continue to negatively affect student’s financial and educational decisions because the cost of attending college has been increasing. In addition, the author Jeffrey Williams wrote “Student Debt and the Spirit of Indenture,” and compares student loans to indentured servants of England in the 1600’s because of increasing pressure to pay off loans. Both authors use very similar statistics and analysis to describe the environment of higher education and its effects that they are having on the current and climbing population of young people. The findings were very similar, and each author takes strong stances on policies that affect college students, and will be discussed below.
Each author has found that the real cost of college has been increasing over the last two to three decades. The price of college has risen faster than inflation for the last three decades and faster than family income for the last fifteen years. The cost of college for the average American family is increasing at unprecedented rates because of state budget cuts and lack of funding for grants. Two out of three students enrolled in college in this nation have to finance their way through college using student loans. In 2004, the average college senior graduate had an astounding $19,200 in debt. There are many different estimations of average debt, some ranging higher or lower than others, but $19,200 seems to be a moderately conservative estimation of debt for an average graduate. In addition, the average indebtedness on credit cards for college students is $2,169 with over 90% of graduating seniors having a credit card. With student loans being harder to obtain, it is agreed that many students have had to place their loans on their credit cards to be able to finance their education.
These statistics show how much debt average college students are holding, and appears to be problematic. Increases in tuition are affecting the rate at which college students are borrowing, as well as an increase in need for high school students to get a college education. Many estimates have put the lifetime earnings differentials of a college graduate and a high school graduate at over $1,000,000 in life time earnings. 46% of 24 year olds in the top quintile of earnings had bachelor’s degree, versus 8% of college graduates in bottom quintile, showing the need to get a bachelor’s to assure a higher income stream. With this being said, the cost of not getting a college education can be very expensive over a lifetime, causing increases in amounts of high school students to attend college. In 1970 there were seven million college students, and just thirty two years later in 1992, there were fourteen million, despite of an increase of three million total populations from 36-39 million. Getting a degree is no longer getting an education, but becoming an investment towards future earnings potentials.
Another problem that college students are facing is the shrinking amounts of grants being given to students. In 1971 45% of aid from the government came in the form of student loans, and 52% came in the form of a grant. There has been a reversal in this trend, however, and in the late 1990’s just 41% of aid came in grants and 58% through student loans. During the budget cuts from the federal government in the 1990’s, the federal government found it to be less costly to give out more federal loans versus grants. During college, the federal government pays for your interest, and the interest does not start until six months after graduation and decided to use this method as its primary source of funding. In 1972, the prestigious Pell Grant covered 72% of costs for a college student, and in 2004 just 36% of costs were covered.
With less amounts of grants being given out, students must pick up the bill by taking out loans. Often private loans are the solution because it is becoming harder to get a student loan through the federal government. The private loan industry has becoming an extremely profitable industry. In 1995 the private loan industry grew from $1.1 billion to $15 billion in 2005 and many companies recorded record profits during this time period. Private loans are often used and are much riskier and costlier than federal loans to students. Private loans offer much higher interest rates (often nearing commercial loan rates), no deferments, no grace periods, and fewer repayment options.
In the 2007-2008 school years an average University of Illinois graduating senior had $17,938 in debt. Comparably, in 2003-2004 a graduating senior had only $13,994 in debt from the student financial aid office, so these figure do not even count private loans taken out. In just a four year period, the average debt increased by nearly four and a half thousand dollars, and with a net increase of over 29% (located in Appendix G, is the full table). This has been caused by increases in tuition over time at this university because of state cuts and increases in projects such as the ARC and many other campus wide projects. In this four year period the amount borrowed went from around $83 million to nearly $122 million, which was an increase of 40.5% in this short time period. The increase of students over this time period increased as well, and went from 5,785 graduating seniors students to 6,892. The percentage of the students that borrowed stayed fairly steady that went from 48% to 51%, so the university is giving the same percentage of funding for student loans, but has to offer it to over a thousand more students paying higher tuition costs. As we can see, there has been a sharp increase in the amount of students while keeping the same percentage borrowing that is making students in our university needing to borrow more money. Information on private loans is rarely available because of the vast assortments of banks that offer private student loans, so these figures only include state and federal aid.
Methodology
In order to gather quantitative and qualitative data about the effect of having tuition loans s on college spending, we conducted three focus groups with university undergrad students as well as analyzed data from an online survey. The online survey was a multi-topic class collaboration of 103 questions; 33 were directed towards our topic. In order to send out this survey via a university email list, it had to be approved by Rhonda Kirts who is the Associate Dean of Students. She reviewed the questions to make sure they were appropriate and valid. The survey was sent by Campus Information Technologies and Educational Services at the University of Illinois (CITES) to a sample of 4,753 students who were selected to represents a 10% sample of the university. The sample was selected by the office of Carol Livingstone, Associate Provost and Director, Division of Management Information. The email that was sent is viewable in appendix A. 421 students responded to the survey, which is an 8.9% response rate and a .89% response from of the entire university. Appendix B lists the exact questions from the survey we chose to analyze. Students answered basic demographics such as year in school, race and gender so we could consider if there was any significant difference among demographics, the sample is analyzed in the sample section of the paper. We also asked about different types of income like summer or school jobs or parent’s support to see if this had an effect on loan size. The survey also asked students to estimate the amount of their loan upon graduation and how long they think it will take to pay it back. The survey allowed us to get numbers that may be more difficult in a focus group because asking about income and loan amounts is a subject that is very personal to some students. We analyzed the trends of the survey in the results section of this paper and discuss the implication of the data in the discussion section.
In addition to collecting survey data, we chose to conduct three focus groups to get qualitative data and personal experiences from University of Illinois Undergrads. Focus groups were an excellent way of gathering information that surveys can not always get. Surveys limit the choices or manner of answering a question and may misrepresent the participant. Focus groups are also different than an interview because interviews do not capture the socialized disclosure that come from group behavior. In a focus group, the moderator asks the group a question and leaves the floor open for a group discussion. This allows participants to encourage one another and causes them to disclose more information (Krueger and Casey, 2000). We initially planned on doing four focus groups, three with students who have loans and one with students with no loans. By doing focus groups with those with and without loans separately, we would be able to capture the opinions of both groups with fewer conflicts of opinions.
The recruitment process was difficult, and we were forced to take more than one approach. Our initial plan was to hand out a survey that would help us pick a diverse set of students. This survey is viewable under appendix C. We went to the Courtyard Café in the Illini Union to pass out recruitment surveys. We chose the Courtyard Café since there are always a mixed group of undergrads who are usually in-between class and therefore less likely to mind filling out a survey. To incentivize students to fill out a survey, we offered them candy bars. Before filling out the survey, they were also given the option to read our research project information form which is viewable in appendix D. We were able to gather 43 surveys from about an even number of males and females and a good mix of ages. The most important information on the survey was to find out if they had a loan, and if so, to what amount. We also asked if they would be willing to participate in a focus group and what their available times were. To our surprise, about half of the people surveyed said they were willing to meet. We decided to invite everyone that agreed to meet since we thought the response rate might be low. A copy of the email we sent is located in appendix E. Since this was our first attempt to gather a focus group, we decided to offer a very attractive incentive. Participants of our group would receive refreshments of pizza as well as a $10 gift certificate to Best Buy—at the time we didn’t realize gift cards were not allowed. We offered two different possible times and told them they must respond to take part in the discussion. Sadly, we only received a response from one person who was willing to meet. In hindsight, the requirement may have been at a busy time for students in the semester. We tried to conduct these focus groups the week before thanksgiving break which is a hectic time for students due to midterms and projects. Because of the overwhelming lack of willingness to participate, we were forced to take an alternative approach to recruitment. We decided each group member would be responsible for conducting one focus group and would recruit participants that were our own personal acquaintances. Everett moderated a group of two seniors and two juniors all of which were males. Peter moderated a group of six male seniors. Joe moderated a group of males, three sophomores and one senior. Each of the moderators provided pizza, soda and snacks for their participants. Discussions lasted for about a half hour each. Participants signed proper consent forms and the sessions were recorded and transcribed.
Sample
The online survey was sent out to 4,753 students in an attempt to gather data from a set of students that numerically represented the student body. The university is 64% Caucasian, 13% Asian/ Pacific Islander, 7% Hispanic, 7% African American, 6% Foreign, 2% Unknown race and less then 1% Native American. The sample sent was targeted towards 41% Caucasian, 9% Asian/ Pacific Islander, 5% Hispanic, 4% African American, 40% Foreign, 1% Unknown race and less then 1% Native American. We see a significant difference in the amount of foreign students targeted for this sample, 40% compared to 6%. Although this would not have been our preferred target sample, we were sharing this survey with another group that was studying only international students. Therefore, our survey was sent out to every single international student, 1899 in total. The response of 421 students were 55% Caucasian, 17% Asian/ Pacific Islander, 4% Hispanic, 1% African American, less then 1% Native American and 23% “other”. The response sample was fairly close for the majority groups: Caucasians, 55% compared to 64% and Asians, 17% compared to 13%. However, there was a large amount of students that classified themselves as “other”. It was found that 92% of those that claimed to be “other” were international students. We decided to omit all responses from international students and leave them out of our analysis. Although the study of international students and loans may be interesting, it was not congruent with our thesis. After this adjustment, the response, although small, is a fairy good representation of the student body.
Another important demographic of the survey was year in school, gender, and major. The sample response was very even among all years: 28% freshmen, 23% sophomore, 24% junior, and 25% seniors represented the sample response. Gender was also fairly close but with a slight overrepresentation of females. The University is 47% female while the survey was 55% female. For Major’s, the largest representation was from LAS students at 39%, then Engineering at 24% then General studies, Business and Agricultural studies all made up 8% as well. University of Illinois is made up of 41% LAS, 17% Engineering, 10% business, 6% General studies and 8% ACES. We can clearly see there are no large biases in response rate and major or year in school.
The university survey came out to be a good representation of our campus; unfortunately, it was more difficult to recruit a proper sample for our focus groups. Of the 14 people we conducted focus groups with, all were men. We had 0 freshmen, 3 sophomores, 2 juniors and 9 seniors. Each focus group was held with students who had loans. The original intent was to have a forth focus group with students without students loans to be used as a comparison. Although there was room for improvement, we still gained value from the discussions. Of course, it would have been better to have half the sample made of females, we had to do the best we could with the low willingness of participants.