In Your Debt: The Impact of Stafford Loans on Community College Students

Each year, millions of young adults and their families are faced with the increasingly difficult question of how to pay for college. The government has tried to alleviate the struggle through programs like Stafford Student Loans, which provide federally backed loans to students to offset the cost of attending accredited post-secondary institutions. Stafford Student Loans can be subsidized, meaning students are not required to pay interest on the loan until they graduate, or unsubsidized, where interest on the loans begins to accrue immediately, although generally at a lower interest rate than loans available in the private marketplace. Although President Obama recently signed new student interest rate legislation into law, not much is known about how students, especially those on the margins of the education system, actually respond to costs and the availability of credit.

In “What Do Stafford Loans Actually Buy You? The Effect of Stafford Loan Access on Community College Students,” author Erin Dunlop explores how the availability of Stafford Student Loans impacts the behavior of students in community colleges. To understand how these federal loans impact student behavior, Dunlop compares outcomes among students in community colleges that offer Stafford loans to outcomes among students in community colleges that don’t offer Stafford loans, after controlling for student and school characteristics.

Dunlop found that students in schools that offer Stafford loans are not observably different from students in schools that don’t offer the loans; however, these students might still differ in important, but unobservable ways, which could bias the results. Even with these limitations, the results provide important information about how the availability of credit correlates with student behavior. For example, Dunlop finds that access to Stafford Student Loans increases the probability of students transferring from a community college to a four-year college by 5.6 percentage points. Moreover, access to Stafford Loans decreases the likelihood that students work while in school by 7 percentages. The latter finding is especially important, since the number of hours students work while enrolled in school often correlates with a lower likelihood of graduation.

Interestingly, Dunlop also finds that access to Stafford Student loans increases the amount of money that students borrow for their education by $262 per year. This suggests that Stafford Student Loans do not replace money that students would have borrowed from the private marketplace, but instead replace other income sources, like parents or work.

Dunlop concludes by conducting a simple cost-benefit analysis to illustrate the policy effect of increasing access to affordable credit for higher education. She points out that, while the benefits of increasing Stafford Student Loan access might seem small, the cost of extending access and the cost to the government of providing loans is small enough that Stafford Student Loans easily pass any cost-benefit test. Extending access to Stafford Student Loans compares favorably to other popular interventions like helping students complete their FAFSA form, early childhood education, or even class size reduction.

With big changes just made to student loan interest rates, understanding the impact of cost and the availability of credit on student behavior is more important than ever. Although not conclusive, Dunlop provides convincing evidence that access to more credit improves education outcomes among students in community colleges.

Feature Photo: cc/(Sydney Missionary Bible College)