Public Colleges Are at Odds Over Raising Limits on Student Loans

Since she was a freshman in high school, Kelly Pierson had wanted to be an

This is the second in a series of articles that explore issues of importance to colleges as Congress begins its review of the Higher Education Act. Issues in Depth: 2003 Higher Education Act Reauthorization ALSO SEE: Opposing Views on Loan Limits Other Priorities for Public Colleges A Profile of 2 Campuses

elementary-school teacher. So her family and friends were shocked when, halfway through her junior year here at Northwest Missouri State University, Ms. Pierson dropped out of the education school to study business.

"My parents were like, 'Are you sure?'" she recalls. "They questioned it because they knew my heart had been set on teaching."

But for Ms. Pierson, who is now pursuing an M.B.A. at the university, the decision to change majors was largely a financial one. She realized that as a teacher in a small rural town like this one, it would be a big struggle to pay off her federal student loans.

"I knew that when I got out of college, I would be $20,000 in debt and wouldn't be making much more than that," she says. "That just didn't make sense to me."

The experience of students like Ms. Pierson has persuaded Dean L. Hubbard, the president of Northwest Missouri State, which has a large teacher-training program, to oppose efforts to push Congress to raise the overall limits on what students can borrow from the federal-loan programs.

"If we continue to increase the debt load of our students," he wonders, "how are we going to attract people to those fields that are not well paid, but important to us as a society, such as teaching or social work?" Mr. Hubbard would prefer to see the government provide more grant aid to low- and moderate-income students rather than requiring them to take on heavy debt loads.

Many public-college officials, however, disagree with Mr. Hubbard's position on the borrowing limits. In fact, some of the loudest calls for increasing the loan limits are coming from public-college leaders, particularly at state flagship universities. They say that the current ceiling on what students can borrow from the federal government -- $2,625 for a first-year student and $22,625 over an undergraduate career -- was set more than a decade ago and lags far behind today's levels of student need.

With the government facing a massive budget deficit, Robert E. Hemenway, chancellor of the University of Kansas, says that it is unrealistic to expect Congress to significantly increase spending on the grant programs. As a result, he says, "if you are focused on maintaining educational opportunities for students, then you have to be for a larger loan limit."

The fight brewing among public-college officials comes as Congress begins considering legislation to renew the Higher Education Act, the law that governs most federal student-aid programs, including the debt ceilings.

Calls for increasing the loan limits have traditionally come from private colleges, which charge more than public institutions. The fact that state colleges are no longer sitting on the sidelines of this debate, some higher-education experts say, is a reflection of the changing economics of public higher education.

By almost any measure, states are providing smaller and smaller proportions of taxpayer dollars to public colleges. Since 1980, for example, the share of state funds used for higher education has dropped to 32 percent from 44 percent. To make up for the decline in taxpayer support, many public institutions have been forced to raise their tuition significantly. As a result, low- and moderate-income students are finding it difficult to afford to attend the institutions without taking on a heavy debt load. According to the latest data available from the U.S. Education Department, the average loan debt of students at public colleges was $16,243 in 1999-2000.

"The loan-limit debate is really just a symptom of a larger issue," says Mr. Hemenway. "And that is the increasing privatization of public higher education."

Conflicting Stances

The two national higher-education associations that represent public colleges -- the National Association of State Universities and Land-Grant Colleges and the American Association of State Colleges and Universities -- are on opposite sides of the loan-limit debate. Those differences became apparent this winter when the two groups disagreed over a proposal by the American Council on Education, the umbrella group representing colleges, that would increase the overall borrowing limit for undergraduates to $30,000.

Under that plan, freshmen would be able to borrow up to $4,000. After that, there would be no annual limits, but borrowers would receive a credit line of up to $26,000, to be used as needed through the college years.

Council officials note that while the limits in the federal-loan programs have stayed static for over a decade, college prices have grown significantly. To make up the difference, they say, more and more students are seeking private loans, offered by providers like Citibank and Sallie Mae, which carry far-less-attractive terms and conditions than those of loans backed by the federal government. For example, the interest on private loans begins to accrue right away. In contrast, the government pays the interest on federal loans for financially needy students while they are in college and for six months after they graduate. According to the College Board, private borrowing by students rose to about $5-billion in 2001-2, up from about $1-billion in 1995-96.

Leaders of the National Association of State Universities and Land-Grant Colleges, which counts many of the state university flagships among its members, have signed on to the council's proposal, although they have alerted lawmakers that they would like to see the freshman limit go up to at least $4,200.

In a May letter to lawmakers on the Senate education committee, C. Peter Magrath, the association's president, wrote that students taking out private loans are often those struggling the most to get through college, including many who are the first in their families to go to college or are from "groups that are underrepresented" in higher education.

"Forcing these students to take out private-market loans with less favorable terms only exacerbates their problems," he wrote.

An Alternative Plan

But raising the overall borrowing limits would do more harm than good, say officials at the American Association of State Colleges and Universities. Student-loan borrowers are already up to their necks in debt, they say, and raising the federal loan limits will only bury them deeper. The group, which mostly represents regional state colleges that are less costly than the flagships, has aligned itself with the United States Student Association and the State Public Interest Research Groups in urging Congress to keep the total limit at $22,625.

Claims that borrowers are being forced to take out private loans are overblown, the groups say. They cite a national survey of college students that was published last year by the U.S. Education Department's National Center for Education Statistics. The survey showed that in 1999-2000, only about 10 percent of all students with federal loans also received private loans. Of those students, only half, according to the survey, had reached the federal loan limit.

As an alternative to the council's proposal to raise overall borrowing, the American Association of State Colleges and Universities is asking Congress to provide aid administrators with the flexibility to allow students to borrow more in their first two years of college. Under this plan, students would be permitted to borrow up to $5,500 in both their freshman and sophomore years, as long as they did not exceed the $22,625 limit over their college careers.

This proposal "would effectively target students who need additional assistance, and ensure that the extra loan burden they undertake will not significantly raise their overall debt burden," Constantine W. Curris, president of the state-college group, wrote in a letter to the Senate education committee in May.

Officials from the state-college group say that the first- and second-year limits -- $2,625 for freshman and $3,500 for sophomores -- are the most inadequate and outdated. They criticize the proposal from the American Council on Education for setting the freshman ceiling lower than for other borrowers. But leaders from the council say that keeping the freshman cap is important because first-time students are the most likely to drop out and default on their loans.

Not Enough

Mirroring the positions of the associations they belong to, Northwest Missouri State and the University of Kansas are on opposing sides of the debate over borrowing limits.

Administrators at Northwest Missouri State, a member of the state-college group, say they would like to see Congress give institutions the ability to provide freshmen and sophomores with larger loan limits than they can currently get, while maintaining the government's cumulative borrowing limit. University of Kansas leaders would like to see the overall limit become more generous.

Students at both institutions agree that the loan limits in the first two years of college need to be adjusted.

"The $2,625 I got my freshman year, that's nothing," says Kendra Buscho, who will be a senior at the University of Kansas in the fall. "What does that really pay for? I mean books alone here can run anywhere from $500 at the low end to $1,500 at the high end. That just doesn't cut it."

Borrowing from private banks to pay for college is still relatively rare on both campuses.

At Northwest Missouri, about 4 percent of the 6,200 undergraduate students took out private loans last year. But only a few of those students took out the loans because they exceeded the overall borrowing limit, says Del Morley, the financial-aid director. Instead, he says, many of those who borrowed private money needed it in their first or second year because they found the federal limits those years to be too low. That is also the case at the University of Kansas, where 382, or about 1.9 percent of the 20,213 undergraduates took out private loans last year.

At Northwest Missouri State, many students are divided over the position of the institution's president, Mr. Hubbard, that the government should keep the $22,625 borrowing limit in place. Where students stand on the issue depends on the types of loans they have received. Many of those who have never taken out a private-loan, for instance, argue that the overall borrowing limit should stay in place.

John McLaughlin, who graduated in May with $13,000 in federal-loan debt, says that the limit "is adequate" and "keeps you from taking out too much."

But Heather Schmidt, who just completed her junior year and is paying for college herself, disagrees. In addition to borrowing up to the federal limit each year, she has had to take out about $15,000 in private loans from Sallie Mae to help pay for college and living expenses. If the government increases the overall limit, she says, "then maybe more people would actually go to college, stay for four years, get their degrees, and not have to worry so much about their economic problems."

A Real Struggle

At the University of Kansas, those who are must unhappy with the current loan limits are out-of-state students from low- and middle-income families.

Last year, Missouri residents paid $4,116 in tuition and fees to attend Northwest Missouri State, about $600 more than Kansas residents paid to attend the University of Kansas. However, out-of-state students paid about $11,000 in tuition and fees to study at the University of Kansas, almost $4,000 more than it cost out-of-state students to attend Northwest Missouri State.

For some of those out-of-state students at the University of Kansas, it's a real struggle to make ends meet.

Take Anne Iverson, an Iowa resident, who was attracted to the university because of its social-welfare program. Because she is paying her own way through college, Ms. Iverson took out both a federal loan and a $14,000 private loan to pay for college and living expenses during her freshman year, which she just completed.

The private loan came at a price. She shopped around, but the best annual interest rate she could get came from the Iowa Partnership Loan Corporation at 9 percent. The in-school rate on federal loans last year was 3.5 percent. Also, the interest on her private loan began to accrue right away, while the government paid the interest on her federal loan. The freshman loan limit of $2,625, she says, is "outdated and ridiculous," adding that the overall limit is too low for out-of state students who are paying their own way through college.

Ms. Iverson is not sure how much more private debt she can accumulate before she has to start considering less costly options than the University of Kansas. She does not like to think of that possibility though. "Honestly, I'm a Jayhawk and everything," she says, "so I'd much prefer to stay here than go anywhere else."

More than anything, the different positions that the two campuses have taken on loan limits has a lot to do with the philosophies of their leaders.

If the government is not going to raise spending on other student-aid programs, the University of Kansas' Mr. Hemenway says, then the only way it can continue to keep college affordable for low- and moderate-income students is to raise the limits on their loans.

"Students are going to suffer, if the government continues to go with these very unsatisfactory loan limits," he says.

As the president of a university that has traditionally specialized in training teachers, Mr. Hubbard worries more about the effects of debt on those going into the profession. "We're losing teachers," he says. "They go into schools, find that they're not making enough money, and then they quit to pay off their loans."

But even some administrators at Northwest Missouri State acknowledge that if prices at public universities continue to grow at the rates they have over the last decade, the university may not have the luxury of standing on principle the next time Congress gets around to renewing the Higher Education Act.

"The scary thing is that the loan limits haven't changed since the early 1990s, and we know what has happened with costs since then," says Mr. Morley, the financial-aid director. "If something doesn't happen to curb the increased costs, we're not only going to see students graduating with more and more loan debt, but we're going to see more and more people wondering if they can go to colleges like ours at all."

NEXT: Students at community colleges are up in arms about a provision in the law governing the federal student-aid programs that penalizes those who work long hours at off-campus jobs to help support themselves.

• American Council on Education
  
  
• Association of American Universities
  
  
• National Association of State Universities and Land-Grant Colleges
  
  
• National Association of Student Financial Aid Administrators
  

• American Association of Community Colleges
  
  
• American Association of State Colleges and Universities
  
  
• State Public Interest Research Groups' Higher Education Project
  
  
• United States Student Association
  

• The limits have remained the same for more than 10 years, despite sharp increases in college costs.
  
  
• If Congress is not going to substantially increase spending on federal grant programs, then increasing the limits will be the only way to keep college affordable for low- and moderate-income students.
  
  
• The outdated limits are forcing college students to go outside of the federal-loan programs and seek private loans that often carry higher interest rates and fees than government-backed loans.
  

• Students are already overburdened with loan debt, and should not be encouraged to borrow more than they can handle.
  
  
• Since most college students do not borrow at the maximum levels permitted, the loan limits do not need to be raised.
  
  
• Raising the limits will relax the pressure on the federal government, states, and colleges to provide need-based aid.
  
  
• Increasing the limits could encourage colleges to raise their prices at rates higher than they would otherwise.
  

• Affirm that Congress has the sole responsibility for determining the maximum Pell Grant each year and that the U.S. Education Department does not have the authority to reduce the size of the award when lawmakers have not provided enough money to cover an increase. The Bush administration wants to have the authority to change the award in an effort to avoid costly budget shortfalls in the program.
  
  
• Revitalize the Leveraging Educational Assistance Partnerships, a federal program that matches the dollars that states provide for need-based aid. Support for the $67-million program has languished in the last decade.
  
  
• Eliminate the fees that borrowers must pay to obtain federal loans from the government and lenders.
  
  
• Remove a provision in the act that bans people convicted of possessing or selling illegal drugs from receiving federal student aid.
  
  
• Maintain the direct-loan program, which provides loans directly to students through their colleges, rather than through private banks, as is the case in the guaranteed-loan program.