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There might be a student loan crisis — but not where you think

Increasing student loan default rates have mostly been among students at community and for-profit colleges.
Increasing student loan default rates have mostly been among students at community and for-profit colleges.
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Students with more than $100,000 in loans from selective private colleges get a lot of the headlines around student debt. But they're not the real face of the student debt crisis, according to new research published today by the Brookings Institution.

The students suffering the most went to for-profit colleges and community colleges, and they're the reason behind the majority of new student loan defaults — even if they didn't take out the most in loans to begin with.

The paper, from Adam Looney of the US Department of the Treasury and Constantine Yannelis of Stanford, linked student loan data with borrowers' earnings records for about 4 percent of all student loan borrowers since 1970. The data showed where a wide sample of students went to college, how much they borrowed, and what happened to them later.

Their research gives the clearest explanation yet for why student loan defaults began climbing after the recession. They found defaults were concentrated among a certain kind of borrower: those at for-profit and community colleges.

These students were slightly older and more likely to come from low-income backgrounds and live in disadvantaged neighborhoods. They attended colleges with low graduation rates. And after they dropped out or graduated, they struggled to find well-paying jobs that would enable them to pay off their loans. About 20 percent of them were unemployed.

Those borrowers made up 70 percent of loan defaults among people who left college in 2011, meaning that they quit paying back their loans for at least 270 days in the first two years of paying them back.

Traditional college students, particularly those at selective colleges, fared much better by comparison.

How explosive growth at for-profit colleges led to soaring defaults

Students at for-profit and community colleges have historically been only a small slice of the student loan pie. For-profit colleges enrolled a negligible share of students until 2000; students at community colleges were unlikely to take out loans at all. Only about 15 percent of community college students borrowed in 2000.

But then that started to change. For-profit enrollments exploded, as this chart of the colleges whose students took out the most in loans demonstrates:

Brookings chart on student loan volume

(Brookings Papers on Economic Activity)

By 2012, 27 percent of community college students were seeking financial help.

The vast majority of for-profit college students borrow; in 2011, for-profit colleges enrolled 9 percent of all college students but one-quarter of all student loan borrowers.

These "nontraditional" borrowers came from poorer backgrounds and attended colleges with lower graduation rates. They also suffered disproportionately in the recession. Unemployment rates for students who borrowed to attend for-profit colleges reached as high as 21 percent; for community college students, it was 17 percent. Even when they found work, they earned very little. Students who attended for-profit colleges earned just under $21,000 per year; students from community colleges earned just under $24,000.

From 2009 to 2011, they made up nearly half of all new student loan borrowers. And for students who left college in 2011, they were an even higher proportion of student loan defaults: 70 percent.

Borrowing went up everywhere, but particularly at for-profit colleges.

(Brookings Papers on Economic Activity)

Two years into repayment, most for-profit college students owed more on their loans than they had when they left school. That means their payments weren't even big enough to keep up with student loan interest.

One bit of good news: Default rates are likely to get better

As the economy has improved and the federal government has tightened regulation of for-profit colleges, enrollments have dropped dramatically. Borrowing has been on the decline at for-profit colleges since 2011, and at community colleges since 2012.

College enrollments are also countercyclical, meaning they go up when the economy is bad and down when the economy improves. Nontraditional students in particular are more likely to be going to college in hopes of better job opportunities, another reason enrollment has been declining.

All this means default rates will probably drop in the future. But the researchers warn that problems will remain. "Many institutions continue to make high-risk loans to students on behalf of the federal taxpayer in return for educational programs that often do not result in a degree or do not result in a degree that leads to a high-paying job," they wrote. And some borrowers are "mired in a system where they are unlikely to have the resources to repay their loans in full, and yet generally have no way to have those loans discharged."