A preliminary draft of a publication from the Brookings Institution provides a great deal of data-driven clarity into the forces underlying the student loan default crisis. The research involves an analysis of millions of individuals, coupling information from student loan applications to the institutions they attended and their income tax data. Together, it offers a much fuller picture of what has gone on and where it all went wrong.
What happened is as follows. Prior to the year 2000, the ratio of new borrowers to individuals fulfilling their debt obligations had been relatively balanced. After 2000, the total amount of student loan debt began to grow quite dramatically, while the rate of debt satisfaction remained stable. Along with the increasing levels of debt the numbers of defaults rose.
The Brookings analysis, by researchers from the US Treasury Department and Stanford University, shows that the high default rates are largely explained by a growing number of low income, adult age individuals taking out loans to attend for-profit colleges, and to a lesser degree 2 year community colleges. The Great Recession exacerbated the trend by increasing the numbers returning to schools as they lost their jobs. The poor educational outcomes of these institutions led to poor labor market outcomes for these students, who couldn’t earn the income to satisfy their debt.
In contrast, student loan default rates have not been higher for individuals who’ve attended more selective 4 year universities, even though their debt levels can be even higher. Their better educational success provided income opportunities sufficient to work down their student loan debt, even given the Great Recession. Default rates are not higher for this group compared to historical norms.
Buried in all of the data is clear evidence that default rates remain lowest among individuals who’ve attended graduate school, who in fact have the highest levels of student loan burden of all the cohorts studied. Graduate students are independent adults, like their counterparts preyed upon by the for-profit industry. However, the low default level of defaults by those with graduate degrees is due to their their relatively higher income levels and ability to service the debt.
Does this mean that the student loan crisis is not a real crisis? Not at all. Clearly, people have been exploited by for-profit institutions, saddled with a debt that their insufficient education does not equip them to repay.
For traditional students, who are paying down their loans just as they have historically, there is no default crisis. However, the debt service to earnings ratio has been growing and perhaps even accelerating as it approaches 10%. Which means that a higher and higher fraction of their income is devoted to paying down student loans, and less available for other expenses. At what level this ratio becomes an economic barrier remains unclear. If earnings levels, which have been static for over a decade, don’t begin to rise, we’ll run into that barrier sooner rather than later.
The full preliminary report can be found here (pdf).