The rising toll of student debt: More than graduates can sustain?

By Emma Dorn, Andre Dua, and Jonathan Law

Total student debt is now higher than credit card debt in the United States, and the numbers are growing quickly and steadily: our research shows that each graduating class has more debt than the class before. How much more can students take?

This is one of a series of data-driven interactive charts aimed at exploring recent US higher-education data and trends. The aim is not to explain but to highlight trends from the data and raise questions for further investigation. We have used publicly available data from the Integrated Postsecondary Education Data System (IPEDS) and the US Department of Education’s College Scorecard. Unless noted, we have looked at all active public and private nonprofit two- and four-year institutions from 2006 to 2016.

To pay for a degree, most students rely on loans and other financial aid to supplement what they can afford. While the weighted average cost of attending a four-year college has increased by 14 percent over the past decade, inflation-adjusted debt has increased by 45 percent over the same time period, and repayment rates have cratered. Clearly, solving the college-debt problem involves not only making higher education more affordable but also ensuring that students are on a sustainable path to pay off their debts.

Here, we examine the relationship between debt and repayment rates among students at four-year public and private nonprofit universities.

See two-year colleges

Section 1 – Four-year colleges

Student debt at four-year universities is growing much faster than the weighted average cost to attend.

Four-year-college students’ debt, inflation-adjusted to 2017 dollars, is growing much faster than the cost of college. Even adjusted for inflation, average student debt has increased by 45 percent between 2006 and 2016, while sticker prices have risen by 22 percent, and the weighted average cost to attend by 14 percent.*

*The weighted average cost of attendance, including living costs, is calculated for in-state students by applying a weighted average of the sticker price (for those not receiving aid) and net price (for those receiving aid). Start and end dates matter but don’t change the story. The change from 2007 to 2017 is 10 percent, per our cost-completion article. Debt is federal student loan debt only.

Costs vs. debt

Four-year students, inflation adjusted to 2017$ (change, 2006-16)

While nonprofitschools are largely regarded as more affordable than private nonprofit institutions, median levels of debt are growing faster among public-school graduates.

Debt is rising for students at all income levels. Although lower-income students qualify for more grants and other aid, they also have less financial support from family and thus end up with similar debt levels as higher-income students.

*Income brackets are defined by College Scorecard as follows: low income is $30,000 or less, medium income is $30,001 to $75,000, and high income is greater than $75,000.

See two-year colleges

Section 2 – Four-year colleges

Fewer and fewer students are making progress in repaying their debt.

Meanwhile, the percentage of students making progress in repaying their debt has dropped significantly. In 2009, 75 percent of students at four-year universities were making progress toward paying off their debt within three years of graduating. By 2016, that share number had dropped to 57 percent.*

*Percentage of students making progress in repaying their debt within three years of starting repayments. The technical definition is the fraction of borrowers at an institution who are not in default on their federal loans and who are making progress in paying them down (i.e., have paid down at least $1 on the initial balance on their loans) three years after entering repayment. Data are only available from 2009 to 2016. Students are likely to enter repayment in a different year than when they exit school because they have a six-month grace period before they have to begin payments, and some are granted deferment because of hardship or upon entering graduate school.

Repayment rate, 2009–16

% of 4-year students making progress to repay within 3 years

Repayment rates are similar across public and private nonprofit institutions—and moving in a similar direction.

Family income also is influential, with 73 percent of students from high-income families making progress toward repaying their debt within three years. The percentage falls to 60 percent for medium-income students, and to 43 percent for low-income students. For students from low-income families, repayment rates have also decreased the most over the decade, widening the repayment gap.

See two-year colleges

Section 3 – Four-year colleges

The relationship between debt and repayment has shifted over the past decade. Historically, higher debt went hand in hand with higher repayment rates, but that is no longer the case.

2009

Each circle shown here represents a single four-year university, sized to represent the number of students and plotted to indicate the average student debt and repayment rate in 2009.

*Only institutions with more than 1,000 undergraduates are shown on the chart. Institutions are shown at the OPEID6 (system) level, with the MAIN campus flag used for the institution name.

Repayment rate

% of 4-year students making progress to repay within 3 years

Median debt per student, 4-year colleges

$ thousand, inflation-adjusted to 2017

In 2009, there was a positive correlation between debt and repayment.

The dense clustering on the left side highlights that student debt at the majority of these universities in 2009 was $15,000 or less when adjusted for inflation.

Universities where student debt stood at $15,000 or more—typically private nonprofit schools—tended to have some of the highest repayment rates overall. For almost all institutions in that group, more than 70 percent of students were making progress to repay within three years.

Overall, more than half of all students (54 percent) were enrolled in institutions that had both moderate levels of student debt (average of $15,000 or less) and high repayment rates of 70 percent or more.

2010

2011

2012

2013

2014

2015

2016

By 2016, however, only 6 percent of students attended schools where debt was below $15,000 and repayment rates were above 70 percent.

That means that 93 percent of students are ending up in institutions with either poor repayment rates, high debt, or both. That is in contrast to just 44 percent of students in 2009.

See two-year colleges

Section 4 – Four-year colleges

Which institutions have managed to buck the growing-debt trend?

While many of the top 100 institutions in U.S. News & World Report’s Best National Universities listings have retained high repayment rates,* only a subset have also kept debt under control.

*The relatively high rates are partially due to demographics of incoming students (higher percentage at a high socioeconomic level) and partially due to the opportunities afforded to graduates of these institutions on graduation.

Repayment rate, 2009–16

% of 4-year students making progress to repay within 3 years

Median debt per student, 4-year colleges, 2006–16

$ thousand, inflation-adjusted to 2017

Students at these top-ranked institutions, then, have a higher barrier to entry but are able to repay their debt faster, given the employment opportunities available to them on graduation.

Which other institutions have managed to retain moderate debt and high repayment rates? One category is institutions that are technical in nature or focused on training students for specific careers. These students likely have an easier time than their peers finding employment immediately after graduation, enabling them to pay back their loans.

Not surprisingly, graduates with higher salaries are more likely to be able to repay their loans. And indeed, another category of institutions that have managed to retain moderate debt and high repayment is those with higher-than-average early-career salaries.*

*Early-career pay of more than $60,000, compared with the average of $48,000 for four-year graduates in our data set.

There are, however, many institutions that don't fall into any of these three categories (top ranked, field specific, high starting salary) and have still managed to buck the trend toward higher debt. These fall across sectors and represent a diversity of institutions.

The past seven years have not been encouraging, with spiraling debt and plummeting repayment rates.

Yet a subset of institutions have managed to keep student debt under control. As the labor market continues to evolve rapidly, the higher education sector as a whole needs to learn from these institutions, reducing the cost to attend and ensuring that their graduates are able to manage the debt they take on.

Data sources:

U.S. Department of Education; College Scorecard; Household Debt and Credit Report, Federal Reserve Bank of New York

About the author(s)

Emma Dorn is the education practice manager in McKinsey’s Silicon Valley office, Andre Dua is a senior partner in the Miami office, and Jonathan Law is a senior partner in the New York office.

The authors wish to extend a special thanks to Arthur Bianchi and Mike Munroe for their contributions to this series of charts and analyses. Special thanks also to the data design consultancy Signal Noise for creating the article experience.

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