The Role of Institutional and State Aid Policies in Average Student Debt

Abstract

Rising college student debt levels have received considerable media coverage and have even prompted policy proposals that link rising student debt with tuition inflation. This article examines the role of state aid policies coupled with tuition and financial aid policy and academic outcomes in determining variation in average student debt. A focus solely on tuition as the culprit in rising student debt misses the significant role that state and institutional financial aid policies and student outcomes play in determining debt levels across higher education institutions. Specifically, colleges and universities being need-blind in admissions, meeting-full-need, limiting loans, and graduating students in high paying majors can have a larger impact on student debt levels than can the cost of attendance. Similarly, higher state-provided student aid significantly lowers average student debt at public universities.

Understanding Student Loan Decisions: A Literature Review

“…The types of financial aid policies can be important determinants of student debt decisions along with tuition and costs (Monks, ). While need‐blind policies increased the probability of college enrollment of low‐income students, they also increased the level of student debt (Monks, ).…”

“…The types of financial aid policies can be important determinants of student debt decisions along with tuition and costs (Monks, ). While need‐blind policies increased the probability of college enrollment of low‐income students, they also increased the level of student debt (Monks, ). Monks () also found that financial aid policies affected private and public institution enrollment differently in that cost of attendance influences student debt levels at private institutions, but not at public institutions.…”

Insights and Implications for State Policy-Makers

“…College affordability has declined substantially in recent years (Delaney, this volume), as state appropriations per student have declined (Delaney; Doyle and Zumeta, this volume) and tuition increases have exceeded increases in family income and state grants (Delaney; Flores and Shepherd, this volume). Students now bear more of the responsibility for paying college costs than they have in the past (Delaney, this volume), and increasingly students are borrowing to pay these costs (Monks, this volume). In states where financial aid is allocated based on criteria other than financial need, the burden on students from lower economic means is greater than ever before (McLendon et al, this volume).…”

“…States should heed a key finding from Monks (this volume): the proportion of need-based state aid to undergraduates is unrelated to student debt levels among both borrowers and all students. This finding indicates that increases in grant aid cannot paper over deep holes in state appropriations to institutions and corresponding increases in tuition.…”

“…A finding by Monks (this volume) may give state policy-makers reason to reevaluate the effectiveness of aid provided to students at private institutions. Monks found that state grant aid appears to ameliorate total average student debt levels at public institutions, but its impact is much more modest at private institutions.…”