The Looming Student Loan Default Crisis is Worse Than We Thought

Summary of Study

Bottom Line: The looming student loan debt crisis provides support for robust efforts to regulate the for-profit sector, to improve degree attainment and promote income-contingent loan repayment options for all students, and to more fully address the particular challenges faced by college students of color.

Until recently, the dominant focus of public concern around student loans has been simply how much of it there is, and how rapidly it has been growing over time. At nearly $1.4 trillion in loans outstanding, student debt is now the second-largest source of household debt (after housing) and is the only form of consumer debt that continued to grow in the wake of the Great Recession.

These aggregate statistics tell us little about the student-level experience with college debt. About one-quarter of the aggregate increase in student loans since 1989 is due to more students enrolling in college. More recent work that tracks debt outcomes for individual borrowers documents that the main problem is not high levels of debt per student (in fact, defaults are lower among those who borrow more, since this typically indicates higher levels of college attainment), but rather the low earnings of dropout and for-profit students, who have high rates of default even on relatively small debts: 37 percent of those who borrow between $1 and $6,125 for undergraduate study default within 12 years, compared with 24 percent of those who borrow more than $24,000.

Trends for the 1996 entry cohort show that cumulative default rates continue to rise between 12 and 20 years after initial entry. Applying these trends to the 2004 entry cohort suggests that nearly 40 percent may default on their student loans by 2023. For-profit borrowers default at twice the rate of public two-year borrowers (52 versus 26 percent after 12 years). The rate of default among all for-profit entrants is nearly four times that of public two-year entrants (47 percent versus 13 percent).

The new data underscore that default rates depend more on student and institutional factors than on average levels of debt. For example, only 4 percent of white graduates who never attended a for-profit defaulted within 12 years of entry, compared to 67 percent of black dropouts who ever attended a for-profit. And while average debt per student has risen over time, defaults are highest among those who borrow relatively small amounts.

Debt and default among black college students is at crisis levels, and even a bachelor’s degree is no guarantee of security: black BA graduates default at five times the rate of white BA graduates (21 versus 4 percent), and are more likely to default than white dropouts.

Trends over time are most alarming among for-profit colleges; out of 100 students who started college at a for-profit, 23 defaulted within 12 years of starting college in the 1996 cohort compared to 43 in the 2004 cohort (compared to an increase from just 8 to 11 students among entrants who never attended a for-profit.)

Read the full study here

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Findings:

  • Trends for the 1996 entry cohort show that cumulative default rates continue to rise between 12 and 20 years after initial entry.

  • Applying these trends to the 2004 entry cohort suggests that nearly 40 percent may default on their student loans by 2023.

  • Debt and default among black college students is at crisis levels, and even a bachelor’s degree is no guarantee of security: black BA graduates default at five times the rate of white BA graduates (21 versus 4 percent), and are more likely to default than white dropouts.