Study: Housing Bust Contributed to Rise in Student Loan Defaults
By Allie Bidwell, Communications Staff
The sharp drop in housing prices during the Great Recession might be partly to blame for an increase in student loan defaults during the same time, according to a new working paper published by the National Bureau of Economic Research (NBER).
The paper, written by Holger Mueller and Constantine Yannelis of New York University’s Stern School of Business, found that the drop in home prices during the Great Recession accounted for 24 to 32 percent of the increase in student loan defaults. Though not directly connected, the drop in home prices indirectly affected student loan defaults through a chain reaction of sorts. The drop in home prices resulted in decreased consumer spending, which in turn led to “a worsening of labor market outcomes,” the paper said. The larger the drop in home prices in a region, the more significant the decline in employment.
The paper’s findings add to the conversation around student loan default, including borrower characteristics that tend to be associated with higher default rates. Research has shown, for example, that older students, those from low-income backgrounds, and those with lower completion rates are associated with student loan defaults.
In addition to living in a zip code where housing prices fell more dramatically, the researchers also found that borrowers from lower incomes are more sensitive to the pricing changes.
However, the paper also found that the income-based repayment (IBR) program reduced both student loan defaults and their susceptibility to declining home prices.
“Importantly, this effect is entirely driven by IBR eligible student borrowers who actually took up the IBR repayment option,” the paper said. “In contrast, IBR eligible student borrowers who did not take up the IBR repayment option continue to exhibit high student loan default rates after 2009.”
Publication Date: 3/29/2017
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