Editors' pick: Originally published Oct. 5.
The nation's unpaid student loan balance--$1.3 billion according to the Consumer Financial Protection Bureau—apparently has nowhere to go but up. Borrowers at the beginning of their careers typically use earnings to pay off student debt that could be spent on homes or autos. Borrowers that are going into default is where the rubber meets the road in this crisis.
In identifying borrowers who struggled to pay those loans, the New York Federal Bank of Reserve and found an unprecedented spike in loan origination between 2000 and 20015, increasing by nearly 300%, heralding the rise in defaults. The jump is attributed to borrowers at two-year public and for-profit colleges, which appears to be the loan default epicenter.
"Given the large increase in the borrower pool and loan originations, it is paramount to understand the consequences of these changes for the student loan default rate," wrote the report's authors, Michael Lovenheim, associate professor at Cornell University's College of Human Ecology, and Kevin Morris, the New York Fed's senior research analyst.
In 2000, the number of borrowers in default was about 100,000 for both public and private two-year colleges. By 2012, it was about 600,000 at two-year public schools and 450,000 at two-year for-profits. According to the National Center for Education Statistics, there were 2,823 two-year public schools and 721 private two-year schools in 2010, the most recent data available.
The New York Fed study links loan defaults to graduation rates. Surprisingly, public two-year institutions had the lowest graduation rate--22% compared to 63% for all students enrolled in all schools in this category. Their much-maligned for-profit college counterparts did slightly better with a graduation rate.
Graduation rates at four-year schools were a different story. Despite an improvement in the graduation rate at four-year institutions generally, for-profit colleges, the study said, "saw a marked decline in their graduation rate beginning in 2007. As of 2015, only 29% of students at for-profit, four-year schools graduated within six years," which has become the new normal for a BA, compared with 58% of students at all other four-year institutions. Roughly 375,000 defaulted on loans used to study for BAs at for-profit colleges in 2011, the peak default year according to the study.
"The fact that so many students are unable to repay their loans even after graduating is surprising," the New York Fed said, "given that there likely is some economic return to obtaining a degree or certificate from these institutions."
For people who took six years to get a BA and three years to finish two-year and less than two-year schools--the latter includes computer coding academies and other boutique venues--enrollment growth and loan availability seem to have little impact on graduation rates.
"As huge numbers of students flowed into the different types of institutions, these marginal students do not appear to have been any more or less prone to graduate on time," the study's authors said. The New York Fed also asserts that the Great Recession—marked from 2009 for the purposes of this study--had no impact on whether students took longer to graduate or wrapped up their studies more quickly.
Still, the New York Fed's researchers noted that "the health of the student loan sector has deteriorated quite steeply from 2000 to 2015" as loan origination increased, and that the decline "essentially spans all types of institutions in this market."
"The trends in the student debt market we observed and the default rate patterns we have described paint a sobering picture of trends in higher education loans," the report's authors stated. "If these outcomes do not improve substantially over the near future as the economy continues to recover, these may serve as a drag on the financial well-being of the nation."