Guess Who’s Most Likely to Default on Their Student Loans?

Student loan default rates have doubled over the last decade, and new research from Adam Looney of the U.S. Treasury Department and Constantine Yannelis from Stanford University, shows most of the increase is associated with the number of non-traditional borrowers attending for-profit schools and two-year colleges.

According to Looney and Yannelis’ research, based on analysis of U.S. Department of Education federal student loan borrowing data, by 2011 borrowers at for-profit and two-year colleges represented almost 50 percent of those leaving school and starting to repay their loans, and 70 percent of student loan defaults.

Their research, “A Crisis in Student Loans? How Changes in the Characteristics of Borrowers and the Institutions they Attended Contributed to Rising Loan Defaults,” published in Brookings Papers on Economic Activity, examines the rise in student loan delinquency and default using a set of administrative data on federal student borrowing connected to earnings and tax (with identifying information removed) records.

“Between 2000 and 2014, the total volume of outstanding federal student debt nearly quadrupled to surpass $1.1 trillion, the number of student loan borrowers more than doubled to 42 million, and default rates among recent student loan borrowers rose to their highest levels in 20 years,” according to the research.

Non-traditional borrowers typically come from lower income families, attend colleges with relatively weak educational results and experience poor outcomes in the labor market after they leave school, according to Looney and Yannelis.

“In contrast, default rates among borrowers attending most four-year public and non-profit private institutions and graduate borrowers who represent the vast majority of the federal student loan portfolio—have remained low, despite the several recession and their relatively high loan balances,” they report.

According to Looney and Yannelis, the changes in borrower characteristics and colleges they attend explain the largest share of the default rate in the U.S.

“These students 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,” they write.

More than 25 percent of borrowers leaving college during or shortly after the recession defaulted on their loans within three years, according to their research.

The research from Looney and Yannelis provides clarity to the picture of student loan borrowers in the U.S. and why they are in distress, according to a report by Susan Dynarski, a professor of education, public policy and economics at the University of Michigan in The New York Times.

“… The data suggests that many popular perceptions of student debt are incorrect. The huge run-up in loans and the subsequent spike in defaults have not been driven by $100,000 debts incurred by students at expensive private colleges like N.Y.U,” Dynarski writes. “It’s not hard to see why. The traditional borrowers from four-year colleges tend to earn good salaries out of college and pay back their loans. Even during the recent years of economic weakness.”

Earlier this month, Dynarski provided her own analysis in The New York Times on borrowers’ student loan payments and the default rate, ACA International reported.

“The Department of Education estimates that 7 percent of graduate borrowers default. But this default rate is far lower than the 22 percent rate for those who borrower only for their undergraduate studies,” according to Dynarski.

She reports this shows how the conversation about student loan debt in the U.S. contradicts the data on which borrowers are struggling.

“Defaults are concentrated among the millions of students who drop out without a degree, and they tend to have smaller debts. That is where the serious problem with student debt is. Students who attended a two-or four-year college without earning a degree are struggling to find well-paying work to pay off the debt they accumulated,” according to Dynarski. “Any proposed solution that does not focus on borrowers at for-profit colleges and community colleges will not address the core of the problem.”

In their report, Looney and Yannelis conclude that the type of college students select matters more and more relative to their success in the labor market and paying their loans.

Students at most four-year public and private non-profit colleges have lower default rates, despite higher loan balances because they also have higher earnings, lower rates of unemployment and greater family resources to help them avoid loan repayment issues even during times of hardship, according to the researchers.

However, they also note that student loan delinquency rates are likely to decline in the future … “thanks to several factors including a steep drop in the number of new borrowers at for-profit and two-year institutions as economic conditions improved, and as oversight of for-profit institutions has been strengthened.”

Expanded eligibility and enrollment in income-based repayment plans will allow borrowers to suspend or reduce payments if they experience a decline in income, according to Looney and Yannelis.

Dynarski is advocating for extending the payment period in income driven plans to 25 years, according to her report in The New York Times earlier this month.

Looney and Yannelis report, despite the improvements that could occur in the future, that many components of the federal student loan system that contributed to current problems remain in existence.

“For instance, institutions whose students face weak economic outcomes and poor loan performance are largely insulated from any financial or other consequences; certain borrowers may borrow very large amounts—often limited only by costs of attendance—contributing to increased risks and part of the reason for rising tuition costs; and many insolvent, largely non-traditional borrowers are mired in a system where they are unlikely to have the resources to repay their loans in full, and yet generally have no way to have those loans discharged.”

Additional findings from Looney and Yannelis’ research include:

  • In 2000, one of the top 25 schools whose students owed the most federal debt was a for-profit institution, compared to 13 of 25 in 2014.
  • Borrowers from those 13 schools owed about $109 billion—almost 10 percent of all federal student loans.
  • “The median borrower from a for-profit institution who left school in 2011 and found a job in 2013 earned about $20,900—but more than one in five 21 percent) were not employed; comparable community college borrowers earned $23,900 and almost one in six (17 percent) were not employed.”
  • “At the same time, the median loan balances of non-traditional borrowers had jumped almost 40 percent (from $7,500 to $10,500) for for-profit borrowers and about 35 percent (from $7,100 to $9,600) among two-year borrowers—driven by greater financial aid eligibility and need, higher loan limits, cuts to state aid and the impact of recession on household finances, and increased tuition costs. These debt increases were much larger among non-traditional borrowers than for borrowers from four-year public and private institutions, or for graduate borrowers.”

More information is available in a video with “Facts Behind the Student Debt ’Crisis’” from David Wessel at the Hutchins Center on Fiscal and Monetary Policy for Brookings.

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