Families rethink college borrowing as loans gain 'bad reputation'

In this Saturday, Aug. 6, 2011 file picture, students attend graduation ceremonies at the University of Alabama in Tuscaloosa, Ala. The number of borrowers defaulting on federal student loans has jumped sharply, the latest indication that rising college tuition costs, low graduation rates and poor job prospects are getting more and more students over their heads in debt. The national two-year cohort default rate rose to 8.8 percent in 2009, from 7 percent in fiscal 2008, according to figures released Monday, Sept. 12, 2011 by the Department of Education.
Butch Dill / AP

With its grassy quad and buildings of golden Kasota stone, the University of St. Thomas seems an idyllic place for college. But it doesn't come cheap.

It costs $48,000 a year if students pay the full sticker price and live on the St. Paul campus. More than half take out federal or private loans to pay for it.

For years, loans were the answer to the "How do we pay for college?" question at St. Thomas and universities across the country. But with national student loan debt approaching a record $1.2 trillion, families are rethinking college finance — and starting to avoid borrowing to pay for school.

"Loans have very much a bad reputation," said Dan Meyer, vice president for enrollment services at St. Thomas.

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A recent report from the student lender Sallie Mae suggests the aversion to debt may be broad-based. It found the share of families who borrow to pay for college has been dropping. This year, 35 percent of families took out loans for college, down from a peak of 46 percent four years ago.

Young people are doing lots of rational things to cut tuition or living expenses and avoid debt, said Sarah Ducich, co-author of the Sallie Mae report, which focuses on students ages 18 to 24.

"Seven out of ten students chose to go to school in-state, they live closer to home or they live at home," she said. "Half of the students that we interviewed either live at home or with relatives to save on their college expenses."

The report doesn't explain why families are so allergic to student loans. But student debt has been getting a lot of negative publicity. Some analysts say the squeeze on young adult finances is dragging down the housing market and broader economy.

Skeptics say the concerns are overblown and counter that the median or middle-of-the-road student loan debt is only $14,000, not a crippling amount.

"Many of the balances are very small — a large proportion of them," said Eric Best, co-author of "The Student Loan Mess: How Good Intentions Created a Trillion-Dollar Problem." The heaviest debts are run up people pursuing law, medical or graduate degrees, he said.

Families clearly want to avoid borrowing, according to Tom Crady, vice president of enrollment at Gustavus Adolphus College in St. Peter, Minnesota.

It's not just loans that families are skittish about, Crady said. Families are generally reluctant to spend money on their kids' education, even if it's clear they can afford to.

"After the stock market dropped, parents are really careful about spending money right now. They don't think it's worth it," Crady said.

The Sallie Mae report found that when schools are just too expensive many students will simply take a pass and won't pay with loans or any other means. This year, two-thirds eliminated a college from consideration based on price alone.

Freshman Leah Seibel didn't have to make that choice. The St. Thomas student is borrowing money but not from a banker. Her parents are lending her money and she'll pay them back.

Her parents don't want her to get stuck paying interest on student loans, so they'll help cover tuition until she can repay them.

"It's like, 'Let's see how much scholarship money you can bring in, and we'll figure it out as we go,'" she said.