Student Loan Default: It Might be the Borrower, not the School

The latest data on student loan default rates was published yesterday by the Department of Education, and you can expect the typical hand-wringing headlines over predatory loan practices as well as the practices of for-profit institutions. But, as usual, the story is more nuanced when you look behind the headlines.

First, an historical perspective. In the 1987-1991 timeframe, the average total default rate was 19.3%, with a high of 22.4% 1990. In addition, the historical low was 4.2% in 2003. So the current rate of 8.8% is not out of the normal range. The full data from the above study (see chart below) shows that although there is a recent uptick (likely due to the recession), the current rate is far from it's peak of 20 years ago, and within "normal" range. The definition of default period from this study is, "The two-year period that begins on October 1 of the fiscal year when the borrower enters repayment and ends on September 30 of the following fiscal year", and timing of the recent recession falls right in that time frame. Since default can certainly occur after this two-year period, this measurement is likely an understatement of the true default rate.


From the National Postsecondary Student Aid Study, the average amount owed for graduating seniors and the average tuition and fees for full-time four-year degree students (non-doctorate granting schools) can be compared to the default rates from the previous report, as below.

The chart shows that for-profit colleges have the largest cumulative student loan debt, with the corresponding highest default rate. However, the students graduating from private, non-profit schools show a higher cumulative debt than public school students, with a lower default rate. Since higher-income families are more likely to have students in private, non-profit schools, they would have better means to deal with this debt. Also, graduates of private, non-profit schools have higher average salaries.

An industry study argues that risk factors for default are student financial independence, full-time employment (working more than 35 hours/week), part-time enrollment, and single parent status, based on Department of Education data. This coincides with a literature review of default studies that shows it is usually an attribute of the student, not the school, that determines default. Successful students are the best predictor of student loan repayment; those with low GPAs and dis-engaged with their studies correlate best with default rate. This is something within the substantial control of both the student and the school, if the school is invested in the student's success - too often they just want the tuition bill paid. It is also possible that there is a correlation between the attributes of successful students (hard work and responsibility) and successful borrowers.

Consider that the recent recession is having an impact on the ability of recent college graduates to find jobs at all, let alone in their field. A recent Rutgers University study concluded that 30% of recent graduates took their first job after graduation just to pay the bills, in a position that was either not related at all or not closely related to their field. The average starting salary for those with a first job in their field was $35,000, and $25,000 for those with a first job not directly in their field. With a average debt load of $24,145 on a typical 10-year student loan, this translates to a payment of about $278, or about 9.5% for a graduate in or near their field and 13.3% for those not in or near their field. At an income level of $25,000 and 13.3% going to a student loan, that leaves little room for living expenses, and a lot of room for doubt of the immediate worth of their education.

All this means that students must be realistic about the usefulness of their education relative to the job market, as well as the value offered by the education and a careful evaluation of how much they can realistically borrow. And perhaps even more so when considering for-profit schools.