Report: The Student Loan Default Dilemma Is Not What You Think

By Allie Bidwell, Communications Staff

The percentage of student loan borrowers who ultimately default on their loans could significantly increase over time, according to a new report from The Brookings Institution.

In an analysis of new data released in October 2017 from the Department of Education (ED), Judith Scott-Clayton — a senior fellow at Brookings and an associate professor of economics and education at Columbia University's Teachers College — found that cumulative default rates will likely increase between 12 and 20 years of initial entry into repayment.

The federal data expanded the scope of what is known about individual borrowers' experience with student debt after entering repayment. Until now, data on student debt and repayment had typically been limited to track students for three to five years after entering repayment. Scott-Clayton examined trends for two cohorts of first-time students (1995-96 and 2003-04) to more comprehensively describe student debt in the context of all students, rather than just borrowers.

Scott-Clayton found that for the 1996 cohort, cumulative default rates continued to increase between 12 and 20 years after borrowers entered repayment. Overall, defaults increased by about 40 percent during that time, from 18 percent to 26 percent.

She used those trends to project future default rates for the 2004 cohort — which had already reached 27 percent by year 12 — and found that nearly 40 percent of borrowers may default by 2023.

Scott-Clayton used the more robust data to show the full extent of default when considering all college entrants, and not just those who borrowed. The 12-year default rate among borrowers increased from 18 percent to 27 percent between the cohorts — an increase of about 50 percent. But looking at all first-time students, the rate increased by 71 percent, from 10 percent to 17 percent between the two cohorts.

The default rate among borrowers was also significantly different across sectors, Scott-Clayton found. For the 2004 cohort, the default rate among borrowers was about twice as high at for-profit institutions (52 percent) as at community colleges (26 percent). However, because the borrowing rates vary, the picture looks different when considering all students, Scott-Clayton found. Overall, students who enter for-profit institutions default at a rate nearly four times as  high as the rate for community college students (48 percent compared with 13 percent).

Scott-Clayton further projected default rates among borrowers at for-profit institutions, concluding the default rate for that sector could approach 70 percent by 2023

"The results suggest that diffuse concern with rising levels of average debt is misplaced," the report said. "Rather, the results provide 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."

While overall concern may be misdirected, Scott-Clayton wrote that her research showed that student debt is significantly more troubling for black students.

"Debt and default among black college students is at crisis levels, and even a bachelor's
degree is no guarantee of security," she wrote, noting that black bachelor's degree recipients are still five times more likely to default than their white peers.

"The new data underscore that default rates depend more on student and institutional factors than on average levels of debt," she wrote.


Publication Date: 1/17/2018

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