Historical student loan defaults far higher than previously acknowledged, current loans likely far worse
For-profit colleges not to blame
January 18th, 2018
On January 11th, the Brookings Institution issued a report finding that the default rate for undergraduate, federal student loan borrowers nationwide will be about 38% by 2023, indicating a true, lifetime default rate of about 40% This is far, far higher than any lifetime default rate publicly acknowledged for federal student loan borrowers previously.
The study estimates that the lifetime default rate for the for-profit borrowers to be about 70%. While this is certainly an astonishingly high default rate, it is wrong-headed to assume that the default crisis is attributable to these colleges.
Consider a representative sample of 100 borrowers from this cohort. In 2003-2004, for-profit borrowers comprised 18% of all borrowers, according to the National Center for Education Statistics (1). So, for a typical sample size of 100 federal loan borrowers, 18 of these would be from for-profit colleges, and 82 would be from non-profit colleges. We now know from the Brookings study that 40 of these 100 borrowers are defaulters. Assuming that the 70% default rate for for-profit borrowers found in the Brookings study is correct, this means that 12.6 of these 18 for-profit borrowers defaulted (or will default) on their federal loans.
Now, let us consider only the non-profit borrowers. Of this 100-borrower sample, we know 82 of these borrowers are from non-profit colleges. Of the 40 defaulted borrowers in the sample, we know that 40-12.6 = 27.4 must have went to non-profit colleges. To summarize: The total number of non-profit borrowers is 82. Of these 82 borrowers, 27.4 have defaulted or will default.
Calculating the default rate for these non-profit borrowers, then, is just the number of non-profit defaulters divided by the total number of non-profit students, or 27.4/82= .334, or 33.4%
Therefore, it can be said that the default rate for non-profit colleges in this cohort is 33.4% – more than one-third of all borrowers!
Clearly, the non-profit colleges can no longer “scapegoat” the for-profit sector, and blame them for the default crisis this nation now faces. It is time for the non-profit colleges to own up to the fact that their students are defaulting at an astonishing rate.
What is more disturbing: In the 2003-2004 school year, the average undergraduate borrower left school with about $10,700 in federal student loans (2). Today, that has increased to about $39,000- greatly outpacing inflation (3). During the same time period, earnings have flat-lined.
For more recent students, the true, lifetime default rate is certainly far higher than the 40% found by this study. Recent WSJ reports show that 400,000 defaults were added to the roles in 2015, and that this increased to 1.1 million defaults added in 2016. This acceleration of defaults, combined with the borrowing and earnings trends since 2003 would indicate that the lifetime default rate for more recent students is surely greater than 50%, probably far greater.
What is most disturbing: Years of White House Budget data confirms that the Department of Education has been making a profit, not a loss, on defaulted federal student loans. Figure 1 (below) shows the recovery rate for federal student loans vs. all other government made or insured loans for 2010- the median year between 2004 and today. Only defaulted student loans are returning more than the government pays out on default claims, and even allowing for generous collection costs, this still remains true.
We have been warning the public and policy makers for many years about the likely true default rate, and the unconscionable profit making on these loans. This has been enabled by the unprecedented, and unwarranted removal of bedrock consumer protections like bankruptcy rights, and statutes of limitations. Bankruptcy rights are called for in the Constitution ahead of the power to declare war and raise an army (4). The removal of these from student loans- and the consequences that we now are witnessing- clearly prove the wisdom of the Founders.
If this lending system is to be fixed, bankruptcy rights must be restored, at a minimum. We urge Congress to immediately pass the bipartisan bill, HR. 2366, to prevent the entire lending system from vanishing into a mist of popular illegitimacy, and to avoid social and economic harms that will likely result.
Contact: Alan Collinge
National Center for Education Statistics, Trends in undergraduate borrowing II, Analysis Report, February 2008
Extrapolated from The Institute for College Access and Success data from Peterson’s, Inc (A Nelnet Company): https://ticas.org/posd/state-state-data-2015
- Article I, Section 8, U.S. Constitution