Debt burden is defined here as the monthly loan payment as a percentage of monthly income. While this is a commonly used indicator, there is no widely recognized standard of what constitutes an acceptable level of debt burden (Greiner 1996). Scherschel (1998) noted that mortgage lenders frequently recommend that student loan payments should not exceed 8 percent of their pre-tax income.

A comparison of the debt burden of the two cohorts reflects differences not only in how much they borrowed but also in the salaries they were able to command, the prevailing interest rates, and the repayment options they selected. Although the later graduates had borrowed more, on average, than the earlier graduates, the combination of higher salaries and apparent better repayment terms resulted in a median debt burden that was similar for both cohorts (7 percent) (tables A and 14). Goldenberg (2003) estimated comparable levels of debt burden for all borrowers (not only bachelor’s degree recipients) in their first year of repayment in all years from 1997 through 2001 (6 to 7 percent) using loan data from a random sample of borrowers in the National Student Loan Data Base and income data from the Internal Revenue Service.

Even though the median debt burden did not increase, graduates with large loans or low salaries faced relatively high debt burdens. For example, 1999–2000 graduates who had borrowed $25,000 or more had a median debt burden of 10 percent in 2001, compared with 3 percent for their peers who had borrowed less than $10,000. Also, low salaries understandably make repaying loans more burdensome. For both cohorts, the lower the income category, the greater the median debt burden was. Those with the lowest salaries had a median debt burden of 18 percent in 1994 and 15 percent in 2001, and those with middle and high incomes had median debt burdens in the 4–9 percent range.

While the relationship between loan payments and earnings is probably the most important indicator of debt burden, it is useful to look at other details of graduates’ financial circumstances and life choices for any signs that undergraduate debt may be creating hardships. Considering graduates who were not enrolled for further education, no systematic differences were detected between those who borrowed various amounts and those who had not borrowed in terms of their living arrangements (table 16) or propensity to marry (table 18).

However, as debt burden increased—i.e., as student loan payments used up an increasing proportion of their salaries—graduates’ ability or willingness to take on other financial obligations was affected. For both cohorts, among graduates repaying their loans, those with a debt burden of less than 5 percent were more likely than those with a debt burden of 17 percent or more to have mortgage, rent, or auto loan payments, and when they did, the amounts they paid were generally larger.

It is important to understand that these data represent debt burden a year after graduation but that debt burden can change during the repayment period. Interest rates on federal loans are variable and therefore may go up or down, and income and employment status can change because of personal circumstances or changing economic conditions. Thus, the extent to which any group of borrowers is likely to have difficulty repaying their loans depends not only on the size of their loans but also on conditions during the repayment period that are difficult to predict when students and their families make decisions about borrowing. Students whose academic success is uncertain or whose families lack the financial resources to help them repay their loans if they run into difficulty are especially vulnerable to these uncertainties.

Finally, it is important to note that although median debt burden a year after graduating has not increased, the amount that the average bachelor’s degree recipient borrowed, and thus will have to repay, has increased. Although loans help students gain access to undergraduate education by reducing the necessary immediate outlay, they do not decrease the total price of going to college; they simply postpone paying the bill.