This is the first study that uses a nationally representative data base of student loan borrowers to examine the similarities and differences among Whites, African Americans, and Hispanics. This is an important research and policy area because of the size of the loan default problem and the dominance of race as a correlate of loan repayment and default in other studies. The nation's student loan program is plagued by clashes among the competing values and goals of public subsidy, educational opportunity, cost effective investment, and institutional accountability (e.g., Hansen & Stampen, 1981; Volkwein & Szelest, 1995). This policy and value conflict remains unresolved (Hearn, 1993) and is amplified by a relative lack of empirical evidence to validate the policies and claims advanced by the various financial aid stakeholders.
For three decades, public investment in higher education has been directed at removing economic barriers to attend and to persist in college. This commitment to educational opportunity produced growth in student financial aid from $557 million in 1963-64 to an astonishing $50 billion in 1995-96 (College Board, 1996). Federal financial aid to college students has increasingly taken the form of publicly subsidized loans (Lewis, 1989). Since 1980 approximately half of all students who attend four-year colleges and more than 60% of students at proprietary schools borrowed at one point in their education (College Board, 1992). These loans must be repaid, and there is public concern about the alarming level of default rates. Knapp and Seaks (1992) have estimated that whereas federal loan volume grew by 58% during the 1980s, the dollar value of default claims grew by about 1200%, accounting for over a fifth of total program costs.
Annual student loan delinquency rates, averaging between 17 and 21% through the 1980s and early 1990s, compare unfavorably with other types of consumer loans where the annual delinquency rates since 1980 have ranged from 1.5% to 3.6% for various types of personal consumer credit and automobile loans (American Bankers Association, 1994), and from 4.6% to 5.8% for various types of home mortgages (Mortgage Bankers Association of America, 1994).
The higher loan default rates by racial minorities constitutes the most consistent and perhaps most troubling finding across the published studies that have appeared to date. Being African or Native American and coming from a family of little education are characteristics that have default rates generally ranging from 30% to 60%. However, none of these studies examines the extent to which the reasons for default behavior may vary by ethnic group. That is the task we undertake in this study.
Our analyses and model development and variable selection incorporate five perspectives from the research literature. Drawing upon the literature on economic behavior, the first three perspectives reflect related theories of human capital, public subsidy, and the borrower's ability to pay; the fourth perspective is founded upon organizational structural/functional approaches; and the fifth incorporates student-institution-fit models from the literature on college outcomes.
Human capital theory emphasizes those variables that reflect an individual's willingness to invest in educational credentials and training that yield a greater return or higher financial compensation (Becker, 1964; Freeman, 1976). Citizens are motivated to pursue postsecondary credentials and training when the benefits outweigh the costs (Manski & Wise, 1983). The benefits include enhanced skills and higher earnings potential. The costs include not only the direct costs like tuition and living expenses, but also the indirect costs of not working. Whereas the costs of higher education must be paid in the present, the benefits can be enjoyed only in the future. Because the economic benefits of education vary by levels of training and by career field, we should expect that loan repayment and default behavior will vary by highest degree earned and by major field of study (Cohn & Geske, 1990). …