A study finds that student loan default rates among students with supportive families who earn a four-year college degree are low compared to low-income borrowers who attend schools associated with low labor market outcomes.
The study, by Adam Looney and Constantine Yannelis, published at the Brookings Institute, comes as many presidential candidates and media outlets are warning that America’s “next big crisis” is student loan debt.
In late August, for example, an op-ed in USA Today by Mitchell Weiss of Credit.com observed that as of the quarter ending on June 30, student loans that are delinquent by 90 days or more “increased to 11.5% of the $1.19 trillion dollars’ worth of education loans, versus 11.1% in the first quarter.”
Before you dismiss four-tenths of one percent as decimal dust, consider this: Although student loans make up only 10% of all consumer debt, the amount of seriously past due student loan payments total nearly one-third of all seriously past-due debt payments. What’s more, of the total $1.19 trillion in outstanding education-related loans, only about half that amount is actually in repayment at this time (the balance is deferred because the borrowers are still in school).
So instead of 11.5% being seriously delinquent, it’s actually twice that amount: 23%.
Weiss bemoans that “no presidential hopeful has articulated a plan that candidly acknowledges the enormous scope of this problem and deals with it in a constructively comprehensive manner…”
He claims the only way to deal with the “crisis” is to “restructure it en masse: extend the duration of every student loan in tandem with modifying the rate of interest so that the installments become affordable.”
Looney and Yannelis, however, matched data on federal student borrowing to earnings data from tax records that were de-identified and found that most of the student loan default increase is associated with the hike in student borrowers from low-income families attending mostly for-profit schools and some other non-selective institutions. Upon leaving school, these students—referred to as “non-traditional borrowers”—experienced “poor labor market outcomes.”
Default rates, however, among student borrowers attending four-year public and non-profit private institutions as well as graduate borrowers, have remained relatively low even though these students’ loan balances are high and the economy has still not recovered. These borrowers, nevertheless, represent—as the study’s authors report—“the vast majority of the federal loan portfolio.”
The researchers add:
Their higher earnings, low rates of unemployment, and greater family resources appear to have enabled them to avoid adverse loan outcomes even during times of hardship. Decomposition analysis indicates that changes in characteristics of borrowers and the institutions they attended are associated with much of the doubling in default rates between 2000 and 2011. Changes in the type of schools attended, debt burdens, and labor market outcomes of non-traditional borrowers at for-profit and 2-year colleges explain the largest share.
According to Looney and Yannelis, during and following the recession, the number of non-traditional student borrowers “grew to represent half of all borrowers.”
With poor labor market outcomes, few family resources, and high debt burdens relative to their earnings, default rates skyrocketed. Of all students who left school and who started to repay federal loans in 2011 and who had fallen into default by 2013, 70 percent were non-traditional borrowers. In contrast, the majority of undergraduate and graduate borrowers from 4-year public and private (non-profit) institutions, or “traditional borrowers” experience strong labor market outcomes and low rates of default, despite having the largest loan balances and facing the severe headwinds of the recent recession. While the number of traditional borrowers also increased over time, recent borrowers’ family backgrounds and labor market outcomes are not much different from their peers’ in earlier years, especially for graduate students and undergraduates at relatively selective institutions. In fact, traditional borrowers earned more, on average, in 2013 than their peers had in 2002. While more recent graduates were hit harder by the recession, the unemployment rate of traditional borrowers who left school and started repaying their loans in 2011 was 7.7 percent in 2013 compared to 6.6 percent for the comparable cohort of recent borrowers in 2002.
The authors conclude that increases in student loan default and delinquency are largely due to a rise in the number of non-traditional borrowers from lower-income families and increases in the rate of default among these student borrowers.
“These recent non-traditional borrowers were disproportionately older, independent of their parents, from lower-income families, and living in more disadvantaged areas,” they explain. “They borrowed substantial amounts to attend institutions with low completion rates and, after enrollment, experienced poor labor market outcomes that made their debt burdens difficult to sustain.”
According to the study, more than 25 percent of these non-traditional borrowers defaulted on their student loans within three years and many more are currently categorized as delinquent.
For traditional borrowers, however, loan default rates have remained low and even improved despite the poor economy. Most of these student borrowers have higher incomes and also tend to owe larger loan balances because of their advanced four-year degrees. Nevertheless, even traditional borrowers with larger balances generally perform well in loan repayment, largely because ultimately they have attained greater success in their jobs and careers.