Student Loan Debt: It's Not Just For Poor People Anymore

While upper-income and upper-middle-income families have historically not needed to drink from the financial aid fountain to pay for their kids’ college educations, soaring tuition costs (and declining net worth) have forced even the well-off into taking out loans, adding to the already enormous $1 trillion ocean of student loan debt in the U.S. Surprisingly, this may end up being a good thing for the next generation.

The Wall Street Journal recently looked at Federal Reserve data and found that households earning between $94,535 and $205,335 represented the biggest jump in the percentage of households with student loan debt, from 19.5% in 2007 to 25.6% in 2010.

The average amount of student loan debt owed by these households also increased, from $26,639 to $32,869, during this time period.

These are the same families that colleges have depended on to just write out checks for the full tuition amount each semester. But if these households choose to look for less-expensive schools rather than have to borrow, there’s a chance it could help curb the skyrocketing cost of a higher education.

One L.A.-based private-college counselor tells the Journal that some of her well-off clients are opting for less-prestigious “second tier” schools that come at half the price of the big-ticket universities.

“I’ve been seeing these more realistic calculations and choices, rather than families just going for highest-ranked schools,” she explains.

According to the survey of more than 200,000 college freshman by the Cooperative Institutional Research Program at UCLA, students with family incomes of at least $150,000 have grown very cost-conscious since 2007. The number of these students saying that price was a “very important” factor when picking a college has increased by 20.7% during this time. That’s the largest increase of any income group in the survey.

One of the reasons for the increased borrowing by upper-middle-income households is the fact that while inflation-adjusted tuitions have doubled in the last two decades, these families are still generally considered too well-off to receive any need-based grants. So even though their buying power at colleges has dropped significantly, they are still viewed as being able to afford an education without assistance.

“[T]his downturn has been long enough and severe enough that, for a generation, it will alter the way families think about price and higher education,” says Richard Bischoff, vice president for enrollment management at Case Western Reserve University in Cleveland.

As we discussed a few weeks ago when we spoke with Rohit Chopra, Student Loan Ombudsman at the Consumer Financial Protection Bureau, higher education is one of the few places where you are expected to pay upwards of $250,000 without being able to negotiate the price down.

The only thing, barring legislation, that consumers can do to rein in price increases at colleges is to choose not to pay exorbitant tuitions.

There will always be some families who won’t have the heart to tell their children they can’t attend some big-ticket university because of the big-ticket price tag; just as there will be those families who are still convinced that having an impressive school listed on your resume guarantees a good living after graduation (it doesn’t).

But if enough students opt for schools where they won’t need to take out loans, it could put pressure on the higher-priced colleges to throttle back on their prices.