Who Is Most Likely To Default On Their Student Loans?
See
Should Anyone Be Eligible for Student Loans? by Josh Mitchell of
The Wall Street Journal. Excerpt:
"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."
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