The historic run-up in student loan debt and spike in delinquencies is largely the result of unprepared students turning to low-quality schools during the recession, according to a new study published Thursday.
The research, set to be presented at the Brookings Institution by a Stanford economist and U.S. Treasury official, aims to shed light on the factors that have tripled U.S. student debt to $1.2 trillion in just 10 years while sending delinquencies soaring to nearly 30 percent.
It overturns many assumptions about the problem, which is far more acute for “non-traditional” student borrowers, meaning those who did not attend a four-year public or private school immediately after high school.
“To the extent there is a crisis, it is concentrated among borrowers from for-profit schools and, to a lesser extent, two-year institutions,” authors Constantine Yannelis and Adam Looney write in the paper.
Although there has been evidence to suggest that non-traditional students battered by the jobs crisis were the biggest victims of unmanageable student debt, Yannelis and Looney’s paper illustrates the extent of the problem using a new and comprehensive dataset. It includes merged data from administrative records on student loan burdens and earnings information from tax records, covering 4 million individual borrowers over the past four decades.
Some of the findings are remarkable. Of students leaving school in 2011, only half went to for-profit schools or two-year schools. But those borrowers represented more than 70 percent of defaults in 2013. Another 12 percent of defaulters went to non-selective four-year schools, meaning that more than four-fifths of defaults were attributable to “non-traditional” students.
Another noteworthy datapoint: Among those entering repayment in 2009, into the worst of the recession, half of student borrowers who attended for-profit schools defaulted within five years. Almost 40 percent of borrowers who went to two-year schools defaulted.
Overall, Yannelis and Looney discovered that the student loan system features two different groups, with drastically different outcomes: Traditional students and non-traditional students.
The traditional students are mostly young people supported by relatively better-off parents, who went to public or private four-year schools right after graduation. Their experience with student borrowing hasn’t gotten much worse. Even as they graduated during the depths of the recession, their unemployment rates barely budged, and they saw their median student loan balances grow by less than 20 percent from 2006 to the trough of the crisis.
The story was different for non-traditional students. They are older, from families with significantly lower incomes, and more likely to have entered school after struggling to find a job. When they do pursue higher education, it’s more likely to be a for-profit college, a two-year school or a non-competitive four-year public school.
The number of nontraditional borrowers exploded during the crisis, as did the amount of money they borrowed. Between 2006 and the worst of the recession, the number of borrowers at for-profit schools grew 60 percent and those at two-year schools grew 71 percent. By 2014, almost 40 percent of student borrowers were non-traditional. The median non-traditional student saw his student loan balance grow by 35-40 percent.
That shift could be seen in the ranks of the schools whose students owed the most. In 2000, only one for-profit school, the University of Phoenix, was among the top 25. In 2014, it was joined by 11 others, including Walden University, DeVry University, Capella University and Strayer University.
Whether it was because of their relatively disadvantaged background or because of the lower quality of schools they attended, non-traditional students are much less likely to graduate. For borrowers entering repayment in 2011, only about half of for-profit school students graduated, and even fewer two-year college students did. By comparison, about three-quarters of students at four-year schools got their degree.
As past studies have, the paper finds a strong link between failing to graduate and struggling to repay loans. The students who don’t graduate are left with debt but without the added earnings that come with a degree, setting them up for trouble.
Yannelis and Looney do find some good news, though.
They expect that the current soaring rates of default are likely to subside in the coming years, because enrollment patterns are returning to normal as the unemployment rate has fallen and fewer people are turning to college as a back-up plan. Furthermore, the government has imposed much more stringent regulations on for-profit schools in recent years, addressing one of the sources of the most problems associated with student debt.
The study does not address the causes of steeply rising tuition, nor does it examine some of the problems in servicing student debt that have hurt many borrowers.
