Academic journal article Brookings Papers on Economic Activity

A Crisis in Student Loans? How Changes in the Characteristics of Borrowers and in the Institutions They Attended Contributed to Rising Loan Defaults

Academic journal article Brookings Papers on Economic Activity

A Crisis in Student Loans? How Changes in the Characteristics of Borrowers and in the Institutions They Attended Contributed to Rising Loan Defaults

Article excerpt

ABSTRACT This paper examines the rise in student loan default and delinquency. It draws on a unique set of administrative data on federal student borrowing matched to earnings records from de-identified tax records. Most of the increase in default is associated with borrowers at for-profit schools, 2-year institutions, and certain other nonselective institutions. Historically, students at these institutions have constituted a small share of all student borrowers. These nontraditional borrowers have largely come from lower-income families, attended institutions with relatively weak educational outcomes, faced poor labor market outcomes after leaving school, and defaulted at high rates. In contrast, default rates have remained low among borrowers who attended most 4-year public and nonprofit private institutions and among graduate school borrowers--who collectively represent the vast majority of the federal loan portfolio--despite the severe recession and these borrowers' relatively high loan balances. The higher earnings, low rates of unemployment, and greater family resources of this latter category of borrowers appear to have helped them avoid adverse loan outcomes even during times of hardship. Decomposition analysis indicates that changes in the characteristics of borrowers and the institutions they attended are associated with much of the doubling in default rates between 2000 and 2011, with changes in the type of schools attended, debt burdens, and labor market outcomes explaining the largest share.


Between 2000 and 2014, the total volume of outstanding federal student debt nearly quadrupled to surpass $1.1 trillion, the number of student loan borrowers more than doubled to reach 42 million, and default rates among recent student loan borrowers rose to their highest levels in 20 years. This increase in debt and default and more widespread concern about the effects of student loan debt on young Americans' lives has contributed to a belief that there is a crisis in student loans. Using new administrative data sources, we examine recent changes in the market for federal student loans with a particular focus on the sources of rising default rates, the roles played by educational institutions, and the labor market outcomes of borrowers.

These data show that to the extent that there is a crisis, it is concentrated among borrowers who attended for-profit schools and, to a lesser extent, 2-year institutions and certain other nonselective institutions. We refer to these borrowers as "nontraditional" because, as students, they tend to be older, often enroll less than full time, and are living independently of their parents, and also because historically there were relatively few for-profit students and because 2-year students rarely borrowed. As a result, in 2000 these borrowers represented a small share of all federal student loan borrowers and an even smaller share of loan balances.

However, during and soon after the recession, the number of nontraditional borrowers grew to represent almost half of all new borrowers. They experienced poor labor market outcomes, had few family resources, and owed high debt burdens relative to their earnings. Their default rates skyrocketed. Of all the students who left school, started to repay federal loans in 2011, and had fallen into default by 2013, about 70 percent were nontraditional borrowers. (1)

In contrast, the majority of undergraduate and graduate borrowers from 4-year public and private (nonprofit) institutions, or "traditional borrowers," have experienced strong labor market outcomes and low rates of default, despite having the largest loan balances and facing the severe headwinds of the recent recession. While the number of traditional borrowers also increased rapidly over time, recent borrowers' family backgrounds and labor market outcomes are not much different from their peers' in earlier years, especially for graduate students and undergraduates at relatively selective institutions. …

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