"For decades, the federal government has imposed no underwriting standards in its student-loan program. Just about any American can borrow as much as $57,500 for college—and essentially unlimited amounts for graduate school—with little regard for the person’s ability to repay. Everyone taking out federal loans in a given year pays the same interest rate.
Supporters of that no-questions-asked policy say it guarantees every American a shot at a degree and a secure middle-class income. Imposing underwriting standards would deny a higher education to many poor people who can’t get loans from private lenders, they argue.
But a sharp rise in delinquencies in the $1.2 trillion federal student-loan program is drawing comparisons to subprime mortgage lending, which added to the housing crisis. It is also stirring debate on other ways to allot student aid.
New research shows a preponderance of the millions of borrowers who have defaulted on student loans in recent years are poor, were unprepared for college, and attended troubled schools that offered little hope of leading to a decent job.
“It’s not a gift to a poor person who is not going to be able to complete a degree program to give them a loan,” said Caroline Hoxby, a Stanford University economics professor, who calls the soaring load of student debt “a self-inflicted wound on the part of the federal government.
As of Sept. 30, just over 7 million borrowers had gone at least a year without making a payment on their federal student loans, Education Department figures show.
The student-loan delinquency rate has jumped to around 12%, roughly double its level before the recession, according to the New York Federal Reserve. When excluding borrowers still in school, roughly a quarter of all student debt is at least 90 days behind on payments. The comparable number for home-mortgage debt never exceeded 9% after the housing crash.
A recent Brookings Institution study by Treasury Department economist Adam Looney and Stanford’s Constantine Yannelis attributes the rise in both borrowing and defaults since the recession largely to “nontraditional students” who enrolled at for-profit schools and community colleges. Those schools typically have low or no academic standards for enrolling.
Such students made up more than two-thirds of defaults among those who left school in 2011, the study found, analyzing government tax records and student-loan figures. The defaulted borrowers tend to be older, from lower-income families, and more likely to be first-generation college-goers compared with students who attend four-year schools.
Likewise, an October paper by Federal Reserve researchers linked defaults to those who had weak credit scores. About 30% of those who had credit scores of between 500 and 599 a year before they left school eventually became delinquent on their loans. But among those with a score of 680 to 729, only 9% became delinquent, according to the paper, by Fed economists Alvaro Mezza and Kamila Sommer."
