New Report Shows Equity Divide in Student Loan Default Patterns

By Hugh T. Ferguson, NASFAA Managing Editor

While many borrowers are still experiencing a reprieve from monthly student loan payments, as the ongoing federal student loan moratorium enters its third year, new data is showing concerning trends in default patterns.

The Urban Institute recently released a report that dug into the disproportionate effect student loan debt has on Black borrowers’ credit when compared to their white peers.

A snapshot of the loan portfolio is captured with 2015-16 enrollment data, which found that 73% of Black undergraduates had to borrow to pay for their education, while the rate was less than 60% for all other racial and ethnic groups.

“Racial inequities in higher education and the labor market have led to unequal outcomes in student loan borrowing and repayment, with Black borrowers holding more student debt and being more likely to default on it compared with white borrowers,” said Jason Cohn, a research analyst at the Urban Institute and author of the report. “Understanding the characteristics and circumstances of these different types of defaulters is critical for supporting borrowers most at risk of default and helping them recover when they enter default.”

The underlying report makes use of 2010-21 data from one of the three major credit bureaus in order to describe patterns associated with student loan default, how these patterns relate to other financial circumstances, and how those experiences differ by race.

Since the credit bureau data does not provide information on race, ethnicity, income, or educational attainment, Cohn had to disaggregate the data in order to get a framework of racial impacts.

The credit bureau includes individuals’ home zip codes, so the report links zip codes to American Community Survey data on zip codes’ shares of residents by race and ethnicity, median incomes, and shares of adults with at least a bachelor’s degree.

“Although imperfect, these zip code-level data add valuable context to my findings,” Cohn writes.

Specifically, the study narrowed in on borrowers who default multiple times and shows that among these borrowers, they are more likely to hold utility and medical collections debt than other defaulters, have lower credit scores on average, and struggle to recover financially after entering default.

Borrowers living in predominantly Black neighborhoods were found to be more likely to default multiple times and hold utility collections debt at substantially higher rates.

In predominantly Black neighborhoods, 48% of borrowers had at least one default between 2010 and 2019, compared with just 23% of borrowers in predominantly white neighborhoods.

Additionally, borrowers living in communities of color were more likely to hold collections debt than those living in predominantly white neighborhoods. As of February 2022, 35% of Americans living in communities of color held at least one type of collections debt, compared with 22% in white communities.

The report also examined the impact of the federal payment pause and found that student loan statuses, credit scores, and utility and medical collections debt suggest that borrowers who have defaulted were generally in a better financial place in 2021 than in 2019, with those trends persisting regardless of zip code-predominant race or ethnicity. However, the analysis could not point directly to the payment pause as a reason for this improved outcome because other pandemic aid responses may have also played a role.

The report also included a number of policy solutions that build off of the Biden administration’s debt cancellation and Fresh Start initiative plans, and argues that “absent other policy changes to make student loan repayment more lenient or college significantly more affordable, borrowers will continue to default on their student loans, and many will experience long-term and multiple defaults.”

The report urges the administration to broaden its Fresh Start initiative by enabling any borrower who uses loan rehabilitation to be able to use the option again if they redefault. Currently, the loan rehabilitation period is limited to the payment pause.

Additionally, Cohn urges policymakers to consider targeted assistance, particularly for individuals struggling to pay utility and medical bills, which could bolster the finances of vulnerable student loan borrowers.

“Because these data do not provide a complete financial picture, it is unclear whether this targeted assistance would help prevent or resolve a student loan default, but it may contribute to a marginal improvement in struggling borrowers’ finances,” Cohn explains.

In terms of reforms to the loan portfolio, the report also urges policymakers to consider providing guidance to servicers to ensure borrowers who would benefit from an income-driven repayment plan be able to easily access that information and remove administrative burdens that could better ensure affordable monthly payments and also consider forgiving student loans for borrowers in long-term or multiple defaults.


Publication Date: 12/8/2022

Tony L | 12/8/2022 10:42:42 AM

"Targeted assistance" does not solve the problem addressed by this study. It's a band-aid at best. I've seen many students attend colleges they cannot afford instead of going to a more affordable school, choose to live in single housing, rather than shared housing (which is more expensive), and even choose to live in the more expensive campus housing knowing they cannot afford it. Many of these students have the latest, most expensive smart phone on the market too. It comes down to smarter choices while attending school, and minimizing borrowing. I was one of those students who had to borrow loans, and sometimes made foolish choices, but I've paid for them.

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