Demystifying student loan debt default rates: a pattern emerges

Demystifying student loan debt default rates: a pattern emerges.

While student loan debt and its burden remain a serious issue, that burden appears to be much heavier for certain types of students than others. This realization may change the nature and type of relief these borrowers will have access to.

The pattern to student loan defaults.

A new study was presented at the Brookings Institution in early September (2015). Its authors, Adam Looney of the U.S. Treasury Department and Stanford University graduate student Constantine Yannelis, took a deep dive into the increased student loan default numbers of recent years.[1]

What they found is a disproportionate number of defaults occur on loans made to “non-traditional” student borrowers. These are borrowers who do not attend a four-year public or private school after high school. They tend to be a little older and primarily attend for-profit schools or, to a lesser extent, two-year community colleges. These students were also found to account for half of all borrowers exiting school in 2011 and represent 70 percent of defaults. The number of these non-traditional students rose with the unemployment rate heading into—and throughout—the recent economic crisis.

For some of these borrowers, their attempt to use education to move forward economically left them not just behind but in an even deeper hole…and deeper still if they failed to complete their programs. The problem: Better career prospects didn’t materialize.

Allegations of fraud.

Those who attend for-profit schools, in particular, tend to do so to improve their earning power—with recruitment ads reinforcing this. However, where the subsequent failure of their educations to qualify them for better positions has occurred, some are now raising accusations of fraud.

Student borrowers under the federal loan program who feel they were victims of fraud perpetrated by their school are able to apply to have their loans discharged.[2]

Over the last 20 years, only a handful of such cases have been filed. By early September 2015, nearly 12,000 students had asked the federal government to have their college loan debt discharged. The grounds: They assert their school either lied about future job prospects or closed (as in the case of Corinthian Colleges).

As of this writing, over 3,000 claims related to Corinthian College’s closing have reportedly been approved, representing an estimated $40 million in federal loans.2

What now?

Looney and Yannelis expect the rate of student loan defaults will slow down over the next few years due to several factors:

  • Recovery in the employment rate.
  • Reduction in the number of students attending for-profit schools.
  • Improved oversight of those for-profit schools that remain open.
  • Expanded eligibility and enrollment in income-based student loan repayment plans. (The federal loan program’s Pay As You Earn [PAYE] plan, in particular, lets borrowers suspend or reduce their payment amounts if their income decreases.)

Ongoing changes in the federal loan program to address the student loan crisis should also help.

Whatever the circumstances behind your own student loan debt, and especially if you are concerned about having been defrauded, feel free to contact one of our nonprofit member agencies. Their NFCC® Certified Consumer Credit Counselors can help you find the assistance you need and help you determine what type of relief you may be entitled to.

[1] Adam Looney and Constantine Yannelis, “A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising loan defaults,” Brookings Papers on Economic Activity, Fall 2015 Conference.

[2] Anne Flaherty, “12,000 students push for loan debt relief,” Associated Press, published Sept. 4, 2015, Chicago Tribune.

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