The Truth About Student Loan Default Rates

By Richard Vedder

The Education Sector is one of the better research organizations dealing with higher education issues—I’m told it is tied, loosely, with the Democratic Party, which, if true, speaks highly of that group, something you will seldom hear from me. As my sidekick, Bryan O'Keefe, pointed out in his recent blog, the Democrats seem more engaged in higher education issues than the Republicans -- which is a shame for both the GOP and the country.

A recent analysis by Erin Dillon of the Education Sector explodes the myth that loans are not a big deal --a myth strengthened by Department of Education data, which reports the overall student loan default rate is under 5 percent. That number is simply baloney --worse than worthless. The Education Department looks at two year default rates --and most persons default after the second year.

Ms. Dillon looks at extended longitudinal data reaching back into the 1990s and finds much higher default rates -- rates that vary enormously depending on race/ethnicity, size of loan obligations, and post-college earnings. For example, the long term black (non-Hispanic) default rate appears to be around 39 percent, roughly ten times as great as that for Asians (4 percent) --the white non-Hispanic rate is about 7 percent. Similarly, those with $15,000 or more in loans had well over double the default rate (19 vs. 7 percent) of those with $5,000 or less in loans.

Moreover, with rising loan obligations, the default problem is almost certainly going to rise. This is aggravated by another trend that college presidents should be frightened about -- the college-high school earnings differential is NOT growing for women (for a decade), and may be slowing for men. The ability to pay off loans is directly related to post-college earnings, as the Education Sector study makes amply clear.

Here is my read on things. The unsustainable tuition fee explosion has been sustained for longer than expected by the introduction of student loans of ever greater magnitude. The notion, previously novel and suspect, is now conventional wisdom: college is a financial investment, and borrowing to pay for that investment is acceptable and prudent. However, as loan obligations rise relative to post-college incomes, the whole go-go financing becomes more suspect and potentially destabilizing, not only to individual borrowers, but to the American economy at large. The solution is to curb both student loans and the rate of tuition inflation. Until the colleges change their ways and governmental subsidies become more moderate, things are likely to get worse rather than better. We are paying a price for the inefficiencies of colleges that may become glaringly more obvious as the student loan repayment problem grows.