College Guide

Blog

August 13, 2012 1:42 PM Biggest Increase In Student Borrowing Comes From Upper-Middle Class

By Minjae Park

The percentage of households with student loan debt grew most for the upper-middle class—those with incomes between the 80th and 95th percentiles—from 2007 to 2010, according to a story in the Wall Street Journal.

The Journal’s analysis defined upper-middle-income households as those with annual incomes between the 80th and 95th percentiles of all households nationwide. Among this group, 25.6% had student-loan debt in 2010, up from 19.5% in 2007. For all households, the portion with student loan debt rose to 19.1% in 2010 from 15.2% in 2007.
The amount borrowed by upper-middle-income families, meanwhile, has soared. They owed an average of $32,869 in college loans in 2010, up from $26,639 in 2007, after adjusting for inflation, according to the Journal’s analysis.

Student loan debt rose for the upper-middle-income families as their median net worth declined by one-fifth in that same period, the Journal reports. Those families’ incomes, ranging from $94,535 to $205,335, aren’t large enough that they can shrug off the $60,000 annual cost of attendance at an elite private school, but are sufficient to significantly reduce financial aid packages and make many of the students ineligible for subsidized loans.

The Journal story notes that lower-income families, who are also borrowing more, tend to send their children to lower-cost schools. It’s the upper-middle class that has chased “prestige over price,” as Jordan Weissmann of the Atlantic writes, encouraging “the so-called arms race mentality among elite schools, which have piled on expensive amenities and services, along with administrators to run them.”

And as college prices have tripled in the past three decades in real terms, the most expensive schools have managed to maintain a customer base that is willing to pay. But how much more can they raise prices before they price out the upper-middle class?

Student loan debt payments amount to 3.2 percent of monthly incomes for the upper-middle-income families, the Journal story says, and given the payoffs to attending elite schools in starting salaries and future earnings, it seems unlikely families will decide elite colleges, however expensive, aren’t worth the investment—at least in numbers large enough to put pressure on colleges to slow down the tuition hikes.

Weissmann notes that the upper-middle-income families’ willingness to pay has driven the price increases for the schools they tend to favor.

He writes:

If semi-privileged families, and their academically accomplished children, were more cost conscious, you’d likely see somewhat different behavior from the colleges. But so far, the signal from parents and students has been that, when it comes to campus life, more is more.

As long as that last sentence remains true, expensive private colleges will not feel the need to withdraw from the “arms race” of rising tuition. Since lower-to-middle income families benefit from ”discount” prices thanks to grants, it will take the upper-middle-class deciding enough is enough for tuition hikes to abate at the top schools. If the “arms race” winds down, public schools competing for many of the same students will also be relieved of some of the pressure to raise prices in order to provide expensive amenities, such as new dorms, upscale food and fancy gyms.

Minjae Park is an intern at the Washington Monthly.