Default Rates on Student Debt Increase with Lower Balances

by on February 24, 2015 at 7:30 am in Economics, Education | Permalink

Here’s a stunning graph from the New York Fed’s Liberty Street Blog:

What it shows is that default rates on student debt decrease with higher balances or, to put it the other way, the students with the highest default rates are the ones with the least debt.

I wouldn’t have predicted that but here are some possible explanations. First, dropouts have less debt and also less income. But while the debt rises proportionally with years of education the income rises in less than proportion. As I said in Launching, students who drop out after 2 years get less than half of the gains from completing a four-year degree (the sheepskin effect). Thus the 40% or so of students who dropout see their debt rise faster than their income so burdens are higher and default rates increases.

Although the debt to income ratio story is plausible it’s still surprising how many students default with low amounts of debt. Raymond, a commentator at the Liberty Street Blog, offers some additional hypotheses:

I work in financial aid at a large public community college. We pulled data on our defaulters and we found over 60% started with remedial coursework and borrowed their first and second terms. About 80% of the total data population suspended soon after the second term – thus the low amounts. Many were not students just out of high school, they were independent adults. Putting this altogether with the many years I’ve been in financial aid speaking with students I’ve come to a conclusion. 99% of the time when I have a student that has been suspended asking for loans and I mention private or alternative loans they immediately say they don’t have good credit. Bad credit seems to correlate with bad academics. Many seem concerned more with paying bills than paying education. Sometimes they are just out of jail and no one will hire them. Their probation requires they work or get a job which the later is nearly impossible. Other times we have people so deep in the hole in debt already that the student loans was a way to buy more time. The word is out if you have bad credit and are desperate for funds just go to a community college where tuition is low and borrow the maximum. We noticed in our data pull many students graduated from high school or received their GED up to 10 years ago or more! Want the defaults to go down – stop lending to students that have a significant number of remedial courses their 1st and 2nd terms at a college where tuition is already low.

1 Steve Sailer February 24, 2015 at 7:38 am

I like the scene in “Soul Man” when the rich kid explains to the banker that it’s not that he can’t pay his student loans, it’s just that he forgot to pay them, so that’s not default.

2 rayward February 24, 2015 at 8:02 am

Actually, students don’t even have to leave the house to get a student loan: on-line study qualifies for student loans. For those on the bottom rung, student loans are more like income support than education support. Replace the myriad of government programs, including student loans, for higher education with one, simple program: tuition free education at a public college or university for everyone. Not only would it better serve the purpose (promoting education), it would cost less. That’s right, tuition-free education at a public college or university for everyone, everyone, would cost less than what government spends today on higher education.

3 The Anti-Gnostic February 24, 2015 at 8:11 am

How about this: yank the plug on government funding of education for legal adults completely. We don’t need more people going to college; we need less.

4 Jan February 24, 2015 at 8:52 am

The research has clearly shown that the countries with the lowest share of their populations pursuing higher ed have the strongest economies.

5 The Anti-Gnostic February 24, 2015 at 9:13 am

Except you’re so wrong you’re not even wrong. We got the Renaissance, the Enlightenment and the Industrial Revolution without student loans and Pell grants as well. We should expand Harvard so everybody can have a degree from Harvard, then just think how smart we’d all be!

If everybody goes to college, then the value of bachelor’s degrees gets lowered and upper tier students have to get grad degrees at increasingly stratified college. BTW, online universities hand out master’s degrees like candy.

6 Jan February 24, 2015 at 9:20 am

Sorry, was referring to contemporary period. My bad. No, actually, education bad.

This line of reasoning always makes me chuckle. Are you threatened by more people getting an education, degrees, certificates, etc? Not everyone needs an English degree from Oberlin, but there are lots of valuable things and skills people can acquire in college that help them get jobs and earn a living for themselves. And stay out of poverty and off the dole.

7 Jan February 24, 2015 at 9:27 am

And with your statement you imply everyone is already achieving what they can education-wise. You think more people obtaining an education means that it must be of lower value than the education students currently receive. As if it is a zero sum game. If you look at the increase in educational attainment throughout history, you’ll see that you’re completely wrong.

8 The Anti-Gnostic February 24, 2015 at 9:41 am

Because you don’t need the externalities of a guaranteed student loan secondary market to accomplish that. Legal adults can bargain for job training like they bargain for all the other necessities of life.

9 Just Another MR Commentor February 24, 2015 at 9:43 am

Of course AG goes for the usual anti-market position. If we more workers with certain skills we have the whole world to fish from if we could get past the blockade put up by the anti-market lobby.

10 HL February 24, 2015 at 9:45 am

I think the argument is that a diploma’s real value is significantly less than it was x years ago, while it’s cost has significantly gone up.

There are incentives (ideological and financial) to lower standards so more marginal students can attend and graduate university. These lower standards mean that the average quality of graduates is lower. Potential employers realize this and have raised their own standards for hiring by raising the level of credentials needed to get a foot in thee door. Thus more incentive to go back to university and get a better degree. The university then have more incentive to accept more maginal students for a higher degree, etc etc. The cycle continues.

The university wins because it has more students, paying even more money, and they can also say they are graduating and educating many many more people than before. Grade inflation, Credential inflation, etc can be ignored for several reasons. 1. It happens slowly and for the most part the only people paying attention are the ones making money off it 2. Criticizing schools for graduating more students at lesser quality is too nuanced an argument for the masses. 3. As with most institutions these days there’s too much obfuscation and bureaucracy to pinpoint what exactly is going on or who is to blame. Without a specific target to complain about, it is much easier to get away with something.

11 TallDave February 24, 2015 at 11:31 am

Colleges don’t sell education to students, they sell exclusivity to students, and prestige to alumni.

I’m not sure why these activities should not be subsidized by taxpayers.

The university education model is based on a period when books were so rare, you had to go to where the books were. This model does not make sense in the age of MRU and Udacity. Let employers give intelligence tests, let the students who need structure pay a reasonable cost for that structure. The rest of education spending is a gigantic deadweight loss to society.

12 TallDave February 24, 2015 at 11:32 am

Sorry, I’m not sure why these activities should be subsidized by taxpayers.

13 Just Another MR Commentor February 24, 2015 at 11:57 am

Udacity, Edx, etc. just focus on teaching programming mostly. We don’t need more of those slobs, not domestic ones anyway. For a serious career you need a university education at a top school.

14 TMC February 24, 2015 at 9:24 am

I’m sure there is a tipping point to where more college graduates do not add much to the economy.
They should have a term for this. (see website name). I’d guess the range would be 25 – 30 %.
Eliminate, or at least do not subsidize most of the liberal arts majors.
Recognize a for number of these students college is pure consumption.

15 Jan February 24, 2015 at 9:30 am

What is your estimate based on? College graduates have always done better than those with a degree. In fact, I the differences between the earnings of college graduates and non-graduates have continued to diverge in recent decades.

16 Jan February 24, 2015 at 9:31 am

Sorry, college graduates have always done better than those *without* a degree.

17 The Anti-Gnostic February 24, 2015 at 9:45 am

I’d say it’s the Pareto number which society seems to sort out everywhere else. 20% of HS grads should go to college; 20% of bachelor’s should get a master’s; 20% of the master’s into a PhD. You aren’t making silk purses out of sow’s ears; you’re just inflating the number of degrees and putting your higher achievers into ever more stratified and expensive universities for no good reason.

18 TMC February 24, 2015 at 9:56 am

Jan, I have no data to back it up, but I’d say after 25% of the population graduates college, the additional graduates are an affect of wealth, not a driver.

19 dan1111 February 24, 2015 at 9:42 am

Have you actually looked at the data on this?

Obviously the poorest countries have very low levels of higher education, but it would be silly to claim that the former caused the latter.

Beyond a certain baseline threshold of economic development, you will find wide variation in the level of higher degree attainment that doesn’t have any clear relationship to the strength of a country’s economy.

20 dan1111 February 24, 2015 at 9:44 am

Oops. I meant that it would be silly to claim that the latter caused the former.

21 Jan February 24, 2015 at 6:13 pm

It appears the relationship is very clear actually. You can argue about causation, but that is of course an impossible study to conduct.

22 Thomas February 24, 2015 at 8:46 pm

Correlation which no logic for causation is especially meaningless. Or do you believe that eight 4 month training periods, none of which pertain to an individuals job, creates value for an employer?

23 Jan February 24, 2015 at 9:49 pm

People don’t just get education fur the hell of it. And when a lot of people do it the country as a whole does better. It’s why every city/state/country wants a highly educated workforce.

24 Thomas February 24, 2015 at 10:28 pm

You say ‘education’ but is it really the case that we are educating the 40th percentile in non-rigorous fields and actually uncovering value?

25 dan1111 February 25, 2015 at 1:20 am

@Jan, my point is that it seems pretty obvious that lack of college degrees isn’t the problem in a place like Somalia. Instead, unrest/poor institutions are causing both poverty and lack of education. I would argue that this is the case across the very poor countries in the world.

Even if you disagree with that, the question here isn’t “Should the U.S. have a very low education rate like third world countries?” With or without government aid, the U.S. is going to have a high rate of degree attainment, like every other wealthy nation. The question is, is there evidence that raising the percentage with college degrees from 40% to 45%, or lowering it from 40% to 35%, would cause a change in the economy? I say no.

26 Mr. Econotarian February 25, 2015 at 2:33 am

In the United States, 42% of all 25-64 year-olds have a tertiary (higher education) attainment, making it one of the most well-educated countries in the world. Only Canada (51%), Israel (46%), Japan (45%) and the Russian Federation (54%) have higher tertiary attainment levels among this age group.

For 25-34 year-olds with tertiary education attainment, the U.S. ranks 14th among 37 OECD and G20 countries at 42% – above the OECD average (38%), but far behind the leader, Korea (65%).

27 Mike February 24, 2015 at 9:07 am

“… we need less.”

You mean “we need fewer”.

28 Cliff February 24, 2015 at 9:11 am

Yes, everyone was very confused as to what he meant

29 HL February 24, 2015 at 9:21 am

Once I find a grammatical or semantic error I know I can safely ignore the content

30 TMC February 24, 2015 at 9:25 am

You forgot your period. Too bad it was at the end of the sentence and I had to read it all.

31 HL February 24, 2015 at 9:47 am

The ultimate troll

32 TMC February 24, 2015 at 9:54 am

I was on the fence about that. I guess I chose unwisely.

33 TallDave February 25, 2015 at 1:25 am

Trolling is a art

34 David H. February 24, 2015 at 8:48 am

A less radical proposal that would have a similar effect has been implemented in several European countries: Have the government provide loans for tuition, but students only need to repay them when/if they join the top 50% of the country’s wage earners.If they never do, their education will have been de facto free, but still there are social benefits to having them educated.

What wouldn’t be solved by this is the absurd growth in the cost of education. That needs independent attention, and it’s a daunting problem.

35 The Anti-Gnostic February 24, 2015 at 9:15 am

If I promise to loan a student as much as she needs, what do you think is going to happen to tuition?

36 Lord Action February 24, 2015 at 10:30 am

Don’t you want to be subsidizing the people who will make it into the top 50%? If you had perfect information, that’s what you’d do, right? You’d pay for the people who were going to become engineers and nurses and accountants. And you’d tell the people who were going to become barristas with anthropology degrees “Hey friend, this isn’t right for you: you’re wasting two years and a lot of money. Why don’t you try to get an HVAC cert?”

37 fwiw February 24, 2015 at 8:08 pm

I actually like that idea:

A loan you don’t have to pay back if you become a top x% wage earner.

It’s anti-fair, but hopefully someone entering college will take that into consideration when thinking about whether to accept the loan. Theoretically, if incentives work right, you’ll then be subsidizing the people serious about college, and disincentivizing those not.

38 Anon a February 25, 2015 at 7:13 pm

How about the reverse. If within 5 years after your degree you move above the 50% line then you don’t have to pay the money back whereas if your ethnomusicology type degree turns out to be worthless then the government can confiscate 50% of your wages/assets until your debt is repaid.

39 JWatts February 24, 2015 at 9:48 am

“That’s right, tuition-free education at a public college or university for everyone, everyone, would cost less than what government spends today on higher education.”

What complete bunk. The US Department of Education’s entire budget was under $70 billion; and that covers money spent on everything from pre-school through PhD programs and quite a bit of research and administration.

The US had over 20 million students in college last year. The average tuition cost of public colleges in the US last year was roughly $10K per student. So it would take around $200 billion per year to provide “free” college tuition.

TANSTAAFL

40 Lord Action February 24, 2015 at 10:33 am

You’re mostly right, but the Department of Education isn’t the only government spender. I remember when I was in school, there was a lot of money sloshing around from other government entities, notably defense, intelligence, and energy. I gather agriculture is big in some places.

41 JWatts February 24, 2015 at 10:36 am

Sure, but that’s generally for graduate level and it covers more than tuition. It might distort the picture somewhat, but it’s unlikely that replacing the current levels of tuition would be anywhere revenue neutral. Not even within $100 billion per year neutral.

42 JWatts February 24, 2015 at 10:38 am

And keep in mind the original argument was: “would cost less than what government spends today on higher education”.

That’s an argument that doesn’t stand up to even a cursory glance at the data.

43 Lord Action February 24, 2015 at 10:49 am

Yeah, you’re completely right about the scale of the problem.

I was nit-picking, and not rebutting your point.

44 Jan February 24, 2015 at 6:16 pm

Look at how much states spend.

45 Jan February 24, 2015 at 6:15 pm

You forgot state spending.

46 JWatts February 24, 2015 at 7:22 pm

“You forgot state spending.”

State spending on Higher Education is overwhelmingly spent to lower the cost of tuition. That’s why In-State tuition averages $9K per year and out of state averages $22K per year.

47 JWatts February 24, 2015 at 7:23 pm

There’s no need to consider it as a factor in reducing the cost of college tuition, because it’s already being used for that purpose.

48 Thomas February 24, 2015 at 8:50 pm

When Jan hires employees: “Hi, I’m here for the Construction job?” ———– “Okay, the pay is $15/hour” ——————– “Sir, I have a degree in Anthropology from Northern Middle Southern East University College of Northeastern State Community” —————- “Oh, in that case, the pay is $20/hour”.

49 Jan February 24, 2015 at 8:55 pm

Actually all my employees must be minorities who have defaulted on their student loans without even having secured a community college certificate. It also helps if they are wearing a “f%ck the taxpayer” t-shirt.

50 Thomas February 24, 2015 at 10:00 pm

Do you pay 6 figures? I’d like a job…

51 Clover February 24, 2015 at 10:01 am

The problem:

1. Employers give preference to people with college degrees even if what they “learned” has no relevance to the job.

2. Employers give preference to people who graduate from “more prestigious” universities. Part of this is “rational” as a proxy for IQ, part of it isn’t. This allows the prestigious colleges to operate like a monopoly industry, especially due to “in-state tuition.”

My radical solution:

1. Have certain government limitations on how much colleges can charge in tuition. This will especially apply to the “prestigious” schools. There is a huge amount of waste is colleges, they will be forced to cut it. This will save both students and the taxpayer a lot of money.

2. Government policies to raise the bargaining power of workers, such as ending all immigration, raising the minimum wage(to 12$ or higher), subsidized or free healthcare, a government jobs program, and, if that isn’t sufficient, outright redistribution from the rich to the working class. With this, working class Americans won’t feel they have to send their children to college to qualify for paper-pushing jobs that didn’t used to require a college degree.

52 The Anti-Gnostic February 24, 2015 at 11:01 am

Higher education in particular is one of those areas where Republicans could make hay with some old-fashioned economic populism and wrest control of the Megaphone away from the Marxists.

But they’re stupid and venal, so they won’t.

53 JWatts February 24, 2015 at 11:12 am

“Higher education in particular is one of those areas where Republicans could make hay with…”

I doubt that.

Republican position: “We should correct problem X, by providing solution Y.”

Obama: “Here’s more free stuff! Free community college tuition, student loan debt forgiveness!”

There’s no logical argument that trumps the value of giving group X something paid for by group Y.

54 Thomas February 24, 2015 at 10:14 pm

Student loan debt forgiveness? As a military veteran who has paid off prior student loans, I sure got the short end of that stick.

55 Hazel Meade February 24, 2015 at 11:08 am

Great idea. Then we will have the perfect excuse to fire all those tenured professors who don’t do any actual work, right?

Or do we just put the entire higher education establishment on the public payroll, and let them do whatever they want?

56 Erwin Dekker February 24, 2015 at 8:05 am

Surprising finding indeed. It might also be partly explained by the socio-economic background of those who are able and willing to take out these debts in the first place. If these are from the higher strata in the first place one would expect their family to be able to bail them out, and default might be less socially accepted within their peer-groups.

57 Hazel Meade February 24, 2015 at 12:24 pm

This is probably true.

I had an interesting conversation once with a guy who came from what he described as a lower-class background. He apparently had used credit cards and racked up thousands of dollars in debt in his late teens attempting to start a music business. So his credit was totally shot right away.
His words were “Where I come from, you take what you can get.” Apparently, nobody in his family advised him against racking up debt, and most of them were completely comfortable with ripping off creditors with no thought for the long-term consequences of that.

58 Billy February 24, 2015 at 8:17 am

Their data also includes PLUS loans, which are available to graduate students and professional students. If they are including those students borrowing for medical school or law school, then that could help explain what we’re seeing as well. Med school students will borrow a lot, but they also have much higher incomes after graduation.

59 John T February 24, 2015 at 8:25 am

bingo. look at the top end of the scale, thats a ton of loan debt. those are undergrads graduating from top tier schools and people with masters degrees and phds. they are very unlikely to default

60 David H. February 24, 2015 at 9:00 am

I was thinking something similar: It takes very unusual circumstances to rack up $100k+ of student debt, and the people who do it are the sort who went to med school or law school.

I think this, together with the explanations in the post, make sense of this strange correlation. It’s important to note that if all this is right, it is absolutely incorrect that if *some individual* increases his or her debt, that will decrease his/her probability of defaulting on it. That would be a misinterpretation of the data.

61 Lord Action February 24, 2015 at 10:39 am

It depends on what they do with the incremental debt. If they buy a more valuable education with it, maybe it makes sense. If some individual increases his debt by going to MIT over Purdue, or Bates over Middlebury, or to take an extra class, that would be consistent with the data. You can’t rule out that they get what they pay for, at least from the simple data in the OP. The trend is across all the buckets, so it doesn’t seem to be only the big decisions like “Do I go to med school?” as you propose.

Not that it’s obvious that’s what’s going on. Maybe higher debt people just have more comfort taking on the additional debt because they have asymmetric information about their repayment prospects, say because they have rich parents.

62 mkt February 25, 2015 at 3:21 am

Bates over Middlebury? Bates College is a very fine school but I would not expect it to be a better place to pay to attend than Middlebury is. I would expect Middlebury graduates to have higher income than Bates graduates, and indeed Payscale.com says that mid-career Middlebury alumni make more, $96.3K annual income compared to $91.5. Granted Payscale.com’s data are not trustworthy, but both schools are expensive and highly selective — but Middlebury is a little more selective.

63 Lord Action February 25, 2015 at 9:13 am

They’re nearly indistinguishable middle-of-the-road liberal arts colleges. I suppose I view Bates as a little better based on past hiring experiences, but I haven’t been to either and I’ve no dog in the fight. I should have picked obviously different examples, if only not to distract from my point.

64 Cliff February 24, 2015 at 9:14 am

You still have the first 4-5 bars to explain.

65 Lord Action February 24, 2015 at 10:40 am

Yup, that’s an interesting aspect of the data. It’s not just a med school effect.

66 Fafa February 24, 2015 at 1:35 pm

The design of the graph is problematic for understanding what is happening in the middle. In particular, it’s impossible to determine what if there is any kind of inflection point in the 25K-100K range (which might explain the flatness of the 2nd and third to last bars). Would be more interesting to see a basic nonparametric smoothie to determine whether this is just med/law school effect or not.

67 T. Shaw February 24, 2015 at 8:26 am

At all levels, the default rates are unacceptably high. The $100,000+ default rate is like 18%, which is lowest on the chart. Aside from the government, what lender could remain solvent with such horrid loan payment performance?

Maybe, akin to merit-based scholarships, student loan underwriting should factor the student’s prospects for graduating . . .

Let’s accentuate the positive. A $3,000 write-off is preferable to a $100,000 write-off.

68 Andrew M February 24, 2015 at 8:30 am

With a sufficiently high interest rate, any lender could remain solvent with that level of default. Besides, student debt can’t be discharged through bankruptcy, so in practice a default is the same as extending the term.

69 The Anti-Gnostic February 24, 2015 at 9:17 am

Except the interest rate isn’t set by the market; it’s set by Uncle Sugar promising lenders a secondary market for their toilet paper promissory notes.

70 T. Shaw February 24, 2015 at 10:09 am

Academics crack me up!

It’s one reason I come here: comic relief.

71 Stubbs February 24, 2015 at 12:34 pm

I wonder if the difference in default rates has something to do with the likelihood of the lender going after the $100K debtor versus the $5K one. Or are all debts equally addressed by recovery efforts?

72 kk February 24, 2015 at 8:49 am

Does the person making the loan decision care about default? Or do they have quarterly quotas to meet?

Do the lenders care about default ? Are they completely insured by the government ?

Do people take loans knowing fully well they will default and don’t really think they have anything to lose ?

Incentives matter.

73 Jan February 24, 2015 at 8:57 am

One explanation is that people who go to the more expensive liberal arts schools and/or pricey grad programs (i.e. the people who borrow the most money) simply end up doing pretty well for themselves and don’t default. The degrees that cost the most deliver value.

74 Cliff February 24, 2015 at 9:15 am

“Liberal arts”? What is that adjective doing in there?

75 Jan February 24, 2015 at 9:33 am

Ok, we can add expensive boutiquey engineering schools like RPI to that list, too!

76 JWatts February 24, 2015 at 10:01 am

““Liberal arts”? What is that adjective doing in there? ”

In this context, it’s probably correct. If you are going to a really expensive liberal arts school, you’ve probably got rich parents, have an inheritance in your future and the loan is pro forma. A mediocre student coming from a lower middle class family just isn’t going to get admitted to a school like Dartmouth and therefore doesn’t have the opportunity to borrow that kind of money.

There’s a distinct survivorship bias in these figures. You have to pass through multiple years in school to rack up a lot of loans. You have to be a good student at a good school in order to get to the $100K+ category. Most of those students are going to be successful and paying off the loans isn’t an insurmountable hurdle.

77 Lord Action February 24, 2015 at 10:44 am

This probably isn’t what Jan meant, but liberal arts colleges are shockingly expensive. You’d think that not needing equipment or labs or supplies or technicians would mean you could teach people about Plato at lower cost than you could teach them about semiconductor fabrication, but apparently not. I guess all that ivy is expensive…

78 msgkings February 24, 2015 at 1:45 pm

@ JWatts: the opposite is true, lower/middle class kids who can score high enough on the SAT will get admitted to top schools and given a free ride. Especially if they are (non Asian) minorities, but that’s not even necessary. My wife’s cousin, very white, was a smart kid and a water polo player from the lower middle class, got a free ride to Stanford. They want economic and geographic diversity at those schools not just racial.

79 JWatts February 24, 2015 at 1:52 pm

“A mediocre student coming from a lower middle class family”

80 Thomas February 24, 2015 at 10:16 pm

Is that really the case? Are law schools giving Appalachian white kids a 20 point LSAT advantage like black men and women of all races? Doesn’t really seem to be the case.

http://lawschoolnumbers.com/

81 David H. February 24, 2015 at 9:07 am

Great, so let’s just double everyone’s student debt by fiat, and magically, they will default *less*! Everyone wins!

82 Mitch Berkson February 24, 2015 at 9:14 am

Maybe defaulters expect (correctly?) that it is less worthwhile for creditors to pursue smaller amounts.

83 Benny Lava February 24, 2015 at 9:16 am

Here is the real story:

Those most likely to default are community college grads. Hence the low amount. The highest amount represents doctors and lawyers. This makes perfect sense to me the cosmotologist will default with 2k but the doctor will pay with 100k

84 j r February 24, 2015 at 9:54 am

This is what I think as well. The people with >100k are most likely MDs, JDs, and MBAs, in other words, the folks with the most income.

85 Seth February 24, 2015 at 10:06 am

You do realize that the real story is exactly what is explained in the post, don’t you?

86 Richard Harper February 24, 2015 at 9:21 am

When job markets su*k adults go back to school. When they get out and job markets continue to s*ck and they end up defaulting. Rational behavior but unfortunate circumstances. Has someone compared job market conditions with enrollments and default rates?

87 Hazel Meade February 24, 2015 at 11:58 am

IMO a big problem is that loans aren’t tied to the employment prospects or job market demand for the subject of study. So you have a lot of people studying things that there isn’t a lot of demand for. And I’m not necessarily talking about humanities. There are plenty of things like accounting, that SOUND good to someone who doesn’t know what to take, but where there are no real employment prospects for. There are people who go and get a 2-year degree in interior decorating or business administration, and find out that there are no jobs there.
And then there are colleges that will profit from that by ofering these credentialization courses and collecting the student loan money.

For some reason nobody wants to restrict student loan money to depend on job market conditions or employment prospects. They want ot do anything but. Statistics on schools. Graduation rates. But it doesn’t matter what the graduation rate in psychology is if psych grads still can’t get jobs. It doesn’t matter how many accounting majors you graduate if there are no jobs for accountants.

88 Just Another MR Commentor February 24, 2015 at 12:26 pm

What about Eastern European Studies?

89 Hazel Meade February 24, 2015 at 1:23 pm

Why needs a degree when you can just marry into it?

90 JWatts February 24, 2015 at 1:54 pm

Maybe JAMRC’s marriage prospects aren’t that good.

91 JAMR Commodore February 24, 2015 at 1:44 pm

or naval studies, ahoy ahoy!

92 rayward February 24, 2015 at 9:40 am

I attended college and law school at a public university before student loans were common; they weren’t common because the tuition (and cost of living) was so much lower (a few hundred dollars per semester for tuition, even for law school, a two bedroom apartment near campus $150 per month). The explosion in the cost of higher education tracked the explosion in student loans (and inflation in the cost of essentials like housing). Did the latter “cause” the former? I wouldn’t say “caused”, but certainly contributed. One has to ask: who benefits most from government subsidized student loans, the student/borrower or the college/university? My first comment about replacing the myriad of government programs for higher education with “free” education at a public college or university was meant to make the point that government subsidies for higher education cost the government more than all of the tuition paid to all public colleges and universities combined; providing a “free” college education would actually reduce federal government spending on higher education. But all of this is likely academic: as I comment often, we are in the finals days of higher education as we know it, as students seek alternatives to college and its high cost and low prospects. It’s Goodbye, Columbus! Or soon will be. The market has a way of clearing out inefficiency, even in education.

93 Clover February 24, 2015 at 11:00 am

But all of this is likely academic: as I comment often, we are in the finals days of higher education as we know it, as students seek alternatives to college and its high cost and low prospects. It’s Goodbye, Columbus! Or soon will be. The market has a way of clearing out inefficiency, even in education.

I wish that would happen, but I don’t know if it will. Prospects for the non-college educated are still far worse. As America’s economy continues into the Average is Over age, I see more and more young people going to college for just the chance of a middle class value transference job as value creation jobs are automated or taken by immigrants.

94 HL February 24, 2015 at 9:49 am

Does this translate to car loans as well? Do Kia’s have higher default rates than BMW’s?

95 Lord Action February 24, 2015 at 10:26 am

I don’t know, but for mortgages default rate goes up with original loan balance.

96 HL February 24, 2015 at 10:42 am

For other kinds of loans there aren’t any mechanisms that can go “Oh crap, we made a bad decision. Lets stop this guy here so neither of us get into a deeper hole.” Maybe there should be.

97 HL February 24, 2015 at 9:56 am

I’m more surprised that people are surprised as this statistic. It isn’t how much debt you have which results in a default, its how much income you have relative to the payments. People who are defaulting with 1-5k worth of debt have much more immediate priorities for their income than paying some ethereal debt collector. I think they also have realistic expectations that there will be minimal consequences to not paying that debt. What are you going to do, garnish their welfare checks?

98 Quite Likely February 24, 2015 at 10:05 am

Is there any difference in what the consequences are to defaulting on a lot of student loan money rather than on a little

99 Albigensian February 24, 2015 at 10:25 am

Community colleges are relatively inexpensive, but they also have a truly dismal graduation rate. Thus, many of the low-balance defaulters are those who failed to graduate from a community college?

100 The Anti-Gnostic February 24, 2015 at 1:36 pm

If you can’t come up with the money from your own savings or from family and friends to go to community college, you probably shouldn’t bother.

101 required February 24, 2015 at 3:38 pm

If you graduate high school in name only, but still need to take remedial (high school level) classes, then maybe you should not go to college.

102 tomhynes February 24, 2015 at 10:37 am

I bet this is true for all debt: mortgage, corporate bonds, government debt, credit cards. The big borrowers are different from the small borrowers.

103 HL February 24, 2015 at 10:43 am

If I owe the bank a thousand dollars its my problem. If I owe the bank a million dollars its their problem. (Or the governments)

104 chairman February 24, 2015 at 10:52 am

It’s not the government’s problem because nothing bad happens to the government if they don’t get the money back. They don’t miss the money, they create the money.

105 JWatts February 24, 2015 at 11:17 am

Well, let’s not forget that the government can send guys with guns to collect their money. And that generally speaking when it comes to the IRS, you are guilty until you prove your innocence.

106 Jan February 24, 2015 at 8:50 pm

Yeah, most IRS audits and department of Ed institutions involve cold steel down someone’s throat. You didn’t mention threat of violence. You guys love to bring that one up.

107 Thomas February 24, 2015 at 10:03 pm

“Every Communist must grasp the truth; “Political power grows out of the barrel of a gun.”

108 TallDave February 24, 2015 at 11:26 am

The CB prints the money, in theory they are independent.

109 chairman February 24, 2015 at 10:50 am

Easy solution: all government student debt should be 100% forgiven. Absolutely nothing bad at all would happen from this. The federal government should set up high quality universities that it funds and that are free to attend for anyone scoring in the top 20% on a standardized admissions test, with no weight given to meaningless nonsense like grades and extracurricular activities.

110 JWatts February 24, 2015 at 11:18 am

“anyone scoring in the top 20% on a standardized admissions test”

Racist!

111 chairman February 24, 2015 at 11:22 am

Unfortunately this concern is what would hold it back, which is unfortunate because a single standardized test is a MUCH fairer and more meritocratic admissions criterion than all the nonsense that goes into college admissions today — meaningless grades, dumb activities where the middle class shows off their cultural capital, recommendation letters, etc. One test would be much fairer and more meaningful.

112 Rich Whites and Minorities February 24, 2015 at 10:20 pm

Standardized tests are racist. Let’s give minorities and women a 20% boost and then focus the rest of our admissions on things like “spent a year in Guatemala feeding poor people”. That way the only people who are fucked are lower class whites.

113 Hazel Meade February 24, 2015 at 11:17 am

The word is out if you have bad credit and are desperate for funds just go to a community college where tuition is low and borrow the maximum.

You guys have no idea how true this is. For those of you who aren’t familiar, the FAFSA will compute the loan amount you are eligible, which is the full course load plus living expenses. If you don’t take a full course load it is pretty easy to use FAFSA to borrow a lot more than you really need. You can buy a car with this money, for instance. Plus, not taking a full course load means you take longer to graduate, so the time period where you aren’t paying any interest is extended. You can stretch this out to 6-7 years. Then you can walk away and keep the car. You might even have equity in a house – purchase via FHA at 3.5% down, using the student loan money as the down payment. Alternatively, maybe you need money for medical expenses. Take the maximum loan and use the money to pay for your surgery or whatever. Dental work. Whatever. Take the money and use it to finance your DJ business, buy some big-ass amps and some speakers and throw raves. There are a lot of jackasses like this.

114 chairman February 24, 2015 at 11:20 am

What do you expect when it’s not feasible that people get money by finding jobs? The federal government should hurry up about it and just institute a basic income. The days of people having jobs are over.

115 Hazel Meade February 24, 2015 at 12:01 pm

People without jobs breed a lot.

116 Jan February 24, 2015 at 8:39 pm

more fertilization, less immigration!

117 T. Shaw February 24, 2015 at 12:13 pm

What’s the logical sequence? Do we need that accomplished before or after the gumanament issuesto us our $1 trillion coins?

118 Clover February 24, 2015 at 12:34 pm

My cousin did this. She had a degree in a liberal arts field and was living a middle class lifestyle. After her husband got laid off from his middle class job and had to take a crappier, lower paying job, she took out loans and went back to school to be a teacher. This was after they had ran up a good deal of credit card debt and couldn’t get anymore. At around age 40, with three kids, she took out loans for “living expenses” which allowed her to continue to pay her mortgage and liver her middle class lifestyle. It worked for around two years, but she couldn’t find a job as a teacher, and eventually had to sell her house and move to a cheaper neighborhood in a cheaper city.

119 Hazel Meade February 24, 2015 at 1:25 pm

I can’t understand people who rack up credit card debt in an effort to maintain lifestyle.
If I was in that situation, I would sell the house or take in renters, pronto. Before my credit card debts started to mount.
Never have negative cash flow.

120 Clover February 24, 2015 at 1:42 pm

They told me it was because there wasn’t any cheaper real estate in the city apart from in the ghetto and they didn’t want to leave.

121 JWatts February 24, 2015 at 2:03 pm

“I can’t understand people who rack up credit card debt in an effort to maintain lifestyle. ”

A good portion of the populace lives a life of wishful thinking.

It’s also not limited to the personal level. Consider the future SS/Medicare situation in the US. The obvious solution is to raise the near future retirement age and lower current benefits. But nothing is being done and the projections aren’t getting better. When you factor in the high likelihood of at least one US recession in the next 15 years, it’s likely the system will drain the “trust fund” and be insolvent within that period. It’s not a difficult problem, but there’s a wide scale refusal to take any current pain to avoid worse future pain. It’s exactly what happened in Greece.

122 required February 24, 2015 at 3:42 pm

For SS/Medicare:
Lowering the current payout is stealing since they already pay for it.
Raising the age is breaking a promise since the promise of SS is at that age.

123 JWatts February 24, 2015 at 6:35 pm

“For SS/Medicare: Lowering the current payout is stealing since they already pay for it. Raising the age is breaking a promise since the promise of SS is at that age.”

Yes, these are the arguments that keep us heading full speed for the cliff. Granted, I tend to believe that at some point we’ll slam on the brakes. But it will still end up with the post-Baby Boomers getting the short end of the stick.

It’s important to keep in mind that SS will still provide roughly 75% and Medicare around 50% of current levels. I think the Gen-Xr’s and younger could probably swallow the 25% cut to SS, but the Medicare situation is going to require some difficult decisions.

124 Jan February 24, 2015 at 8:42 pm

The obvious solution is to increase the payroll tax. Trust fund is a myth anyway. Other solution is to greatly expand the number paying in by increasing immigration.

125 Thomas February 24, 2015 at 8:53 pm

And when you run out of people on Earth, Jan? Where will you turn to next to keep putting off the long run?

126 Jan February 24, 2015 at 8:59 pm

Oh, god, Tommy, you’re looking so far into the future now. Lots of really talented people want to come to this country. Some to design your computer chips, some to clean your house and still others just to challenge your white privilege.

127 Thomas February 24, 2015 at 10:35 pm

I suggest looking for Earth-like planets populated with sentient beings of sub-human intelligence. If they naturally tend to build pyramids, all the better.

128 A Definite Beta Guy February 24, 2015 at 4:15 pm

I’d rather run up credit card debt and take the chance of not finding a job than sending my kids to a school where 40-60% of students speak Spanish.

129 Hazel Meade February 24, 2015 at 5:49 pm

Why ? They’ll be straight A students at that other school. It will boost their self-esteem.

130 Red February 24, 2015 at 6:13 pm

Straight A students won’t be looked up to.

131 JWatts February 24, 2015 at 6:36 pm

“Straight A students won’t be looked up to.”

To clarify, Straight A students will be beaten and robbed.

132 Jan February 24, 2015 at 8:44 pm

JWatts went to school in a Spanish speaking ghetto. Either that or he watched the Wire while eating sushi in his condo. Either way, he knows this stuff.

133 Thomas February 24, 2015 at 8:54 pm

Jan believes that inner-city schools are bastions of intellectual curiosity.

134 Jan February 24, 2015 at 9:02 pm

Bastions of Tommy insecurity! Did your racquetball club allow their first half black guy yet? Just curious, because I can give you some tips to safe.

135 Truthiness February 24, 2015 at 10:10 pm

If you don’t believe the Crips love calculus, you have a small penis.

136 TallDave February 24, 2015 at 11:25 am

As others have noted, this is only surprising if you’re unfamiliar with the first cohort. Most of those people started college and decided it wasn’t for them, then also decided paying off student loans wasn’t for them either.

I’ll just point out again, if any other industry was doing this it would be called predatory lending.

137 Lord Action February 24, 2015 at 11:33 am

It’s a strange form of predatory lending when lender and borrower both lose. I don’t think that’s the right analogy.

It’s the people who end up with the money, the schools, that are the beneficiaries here. It’s not loan sharking. It’s a bust-out scheme.

138 TallDave February 25, 2015 at 1:19 am

Yes, the schools are the big winners. But remember, student loan debt is nondischargeable in bankruptcy.

If any other industry was selling products of questionable value to teenagers in exchange for six figure nondischargeable debt, there would be talk of jail time. What they’re selling is the closest thing to indentured servitude we have in America today.

139 Hazel Meade February 24, 2015 at 2:12 pm

Many people feel that if they didn’t get a degree they shouldn’t have to pay off the loan.

140 TallDave February 25, 2015 at 1:20 am

I tend to agree, but that wasn’t the deal they signed up for.

141 Bill February 24, 2015 at 1:40 pm

Isn’t it true that student loans are non-dischargeable in bankruptcy?

So, what’s the fuss. They will still owe the money and will have to pay even if they default.

142 Lord Action February 24, 2015 at 1:46 pm

I’m reticent to Google “Student loan bankruptcy debt settlement” because I like getting ads for Porsches and financial services, but I bet most of these defaults are getting settled for pennies on the dollar. Non-dischargeable debt notwithstanding.

143 Bill February 24, 2015 at 7:21 pm

Go ahead and do some research. Satisfy your curiosity and prove your bet and report back.

144 Lord Action February 25, 2015 at 9:26 am

Okay, I claim victory. About 10 percent of requests are settled outright, although that number is hard to find. Mostly the rest get income-based extended payment terms with forgiveness of any remaining unpaid balance at the end.

145 Lord Action February 25, 2015 at 9:27 am

And these are the people who Are Trying To Pay.

146 Bill February 25, 2015 at 10:02 am

Give me a link so I can verify these claims and also tally the amount of money, not the number of claims. What happens to the other 90% who don’t settle.

147 Lord Action February 25, 2015 at 11:23 am

“What happens to the other 90% who don’t settle.”

They receive modifications (which go under a bunch of names), like I said above. Outright settlement is less common, and generally happens when they borrower is sitting on cash but refusing to pay.

And since it appears to be a negotiated thing, the details are lacking. Good luck finding numbers – I don’t expect you’ll be able to tally anything. But based on your comment and Jan’s I fully expected to be wrong. They certainly are trying to sound sinister (with all sorts of “pay or else language”) but the details involve extend and forgive and various get out of jail free paths. I wasn’t basing my original comment on any deep experience with the industry, just knowledge of the extremely limited powers of lenders in the US and the really high default rates.

Here’s a link, but there are a bunch.

http://www.philadelphiafed.org/research-and-data/publications/business-review/2013/q3/brq313_economics-of-student-loan-borrowing-and-repayment.pdf

148 Bill February 25, 2015 at 12:03 pm

Dear Lord, There is no way you can claim victory, unless you think I am careless enough not to read the link you posted, which supports my claim.

Quoting from the report:

“The benefits from defaulting on student loans are, by contrast, limited. Unlike credit card debt, car loans, and other consumer loans, student loans cannot be discharged or reduced by a judge (known as “cramming down”) under personal bankruptcy. Instead, borrowers who are late with their federal student loan payments have to enter into a repayment plan that can last 10 to 15 years, and during that time, a fraction of their earnings will be garnished, similar to what occurs in a Chapter 13 repayment plan under per- sonal bankruptcy. The government can
also garnish the borrower’s tax returns and benefits. Other costs of defaulting on one’s student loans include limited future access to the credit market, since the borrower’s decision to default will affect his credit score from the credit bureau. Evidence from bankruptcy fil- ers may give some sense of the order of magnitude of these costs. For instance, using data from the Federal Reserve’s triennial Survey of Consumer Finances, Song Han and Geng Li find that bank- ruptcy filers are more than 40 percent less likely to have credit cards than comparable households that did not file for bankruptcy. If they do have cards, their lines of credit have far lower limits (by $12,000) compared with those who did not file for bankruptcy. Moreover, bankruptcy filers pay higher interest rates (1.2 percentage points higher) than people who did not file.5”

149 Lord Action February 25, 2015 at 12:21 pm

Maybe I’m missing what you’re pointing out? Can you be more specific?

There are a number of modification plans available. They variously lower your payments, extend your term, and forgive what you can’t pay after some time. They require agreeing to pay in an enforceable way.

Settling outright obviously requires cash on hand to pay a reduced amount. That’s different from a modification, but the effect is similar.

150 Jan February 24, 2015 at 8:48 pm

Yah, you’re wrong. How’s the new 911 and the banker’s handjob package working out for you?

151 Hazel Meade February 24, 2015 at 2:16 pm

Well, we don’t have debtors prison, so how are you going to make them pay?

152 Bill February 24, 2015 at 7:22 pm

Hazel, Ever want to buy a house with an unpaid debt and bad credit history from it. It doesn’t discharge in bankruptcy, so a mortgage takes second priority.

153 JWatts February 24, 2015 at 7:24 pm

That’s not going to make them pay their debt. That’s going to keep them from buying a house.

154 Darius Jalan D'Angelo February 24, 2015 at 10:51 pm

Y i wan 2 buy a howse 4 wen i got ones 4 fre?

155 Paul Mineiro February 24, 2015 at 11:49 pm

My answer: “Want the defaults to go down? Let people default”. Creditors will develop risk models as appropriate. Students will adjust their borrowing behaviour. A more reasonable allocation of capital to education will emerge.

A naive answer I suppose, but we have interfered in this market so radically, what did we expect?

p

156 The Anti-Gnostic February 25, 2015 at 1:42 pm

Markets should operate free of government interference, except the ones that keep academics and their friends gainfully employed.

157 Joe Kazan March 1, 2015 at 2:54 pm

Great post!! I think if your loan is going to default you should file for bankruptcy. You may can discharge your loan by this.

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