Some students might carry a burden of debt that surpasses mathematical possibility, but the cost of the debt isn’t the biggest problem: it’s a lack of earnings.
When borrowers default on student debt, it’s not the high-burdened borrowers, but those with the smallest student debts who have the highest default rates, according to Susan Dynarski, a nonresident senior fellow at the Brookings Institution.
“Of those borrowing under $5,000 for college, 34 percent end up in default. This default rate actually drops as borrowing increases. For those borrowing more than $100,000, the default rate is 18 percent,” Dynarski writes (emphasis in original).
The largest debt tends to be held by graduate students. Law school and medical school aren’t cheap. For graduate borrowers, default rates only hover around seven percent.
The default discrepancy is all about human capital. Lawyers and doctors built up mountains of debt, but they also gain highly valuable skills. With those skills come high earnings that allow them to summit the debt and pay it down. As policy goes, high student debt held by future lawyers and doctors aren’t a grave concern. They aren’t condemned to a life of grueling poverty.
For small borrowers, the story is different.
“The small borrowers tend to be those who spent just a year or two at a for-profit or community college,” Dynarski writes. “They spent little time in college, and so racked up little debt. But they also built up little human capital (and had low stocks to begin with), and so do relatively poorly in the labor market.”
In recent years, small borrowers have driven the increase in student loans. That trend has shown signs of tapering, however, as enrollments have declined for three years at for-profit and community colleges. Access to financial aid, doled out from the federal government, is within reach of any student driven enough to apply, but students are wising up. As students before them struggle to complete a degree, or complete a degree that doesn’t help them get a job, they’re choosing to enter an improving economy.
That’s good news, for young Americans who avoid debt, and for the federal government which loses revenue when students can’t repay their loans.
