A newly released New York Federal Reserve analysis sheds some insight on factors that may determine if student loan borrowers are more or less likely to default on their loans.
According to Fed data, 28% of students who left college between 2010 and 2011 defaulted on their student loans within five years. That’s significantly higher than the students who left school five years earlier, between 2005 and 2006, of which only 19% defaulted within five years.
Defaulting on a student loan is big deal. Not only will someone who defaults on a student loan need to deal with collections calls, but a default can seriously harm a borrower’s credit rating, making it difficult to qualify for a personal loan or other large credit purchases like a new home.
The New York Fed’s analysis highlights factors that could determine default rates years after students leave school. They range from things a student can’t necessarily control — family background and how selective the college they attended was — to things students may have a little more control over, like the degree and major they pursue.
The data show students in these categories are more likely to default on their student loans between ages 20-33:
- Dropped out before earning a degree.
- Enrolled in an associate’s degree program.
- Majored in arts and humanities.
- Attended a for-profit institution, community college or nonselective college.
- Came from a low-income family.
A few of the factors relate to things a student has some control over, like the kind of school chosen and the degree pursued. Another big factor, family background, depends more heavily on chance.
Here’s what the Fed found about how the factors influence default rates.
For-profit, public, or nonprofit?
If a student attended a private for-profit two-year institution, their chances of default were highest of all — just above 3% were in default at age 22, shooting up to 42% by age 33. Students at private four-year for-profits weren’t far behind, with a default rate of
38.8% by age 33.
On the other hand, students were much less likely to struggle to repay their student loans at nonprofit institutions, both public and private. Private nonprofit four-year student had the lowest default rate at 17.2%. They were followed by students who attended public nonprofit four-year institutions.
Selective vs. nonselective
The Fed’s analysis found students who attended colleges that were more selective or competitive defaulted at lower rates that those who attended less-selective colleges. The analysis used Barron’s Profile of American Colleges to classify colleges into selective and nonselective based on competitiveness.
Graduate versus dropout
Whether or not a borrower graduated was the second-strongest predictor of default among borrowers, according to the Fed analysis. Overall, students who dropped out had higher rates of default versus borrowers who graduated no matter what kind of degree they attempted. The analysis notes that may be attributed to the fact graduates are more likely to find more gainful employment that would give them the ability to pay off their loans after earning a degree.
Associate versus bachelor’s degree
No matter what kind of college a graduate attended, students in a two-year degree programs had higher default rates than their peers who enrolled in a four-year college, according to the New York Fed analysis.
But the gap between default rates of two-year and four-year students was widest among students who attended public schools — 21.4% to 36.5%, respectively— a difference of more than 15 percentage points
STEM versus arts and humanities
Students who majored in arts and humanities defaulted on their loans at the highest rates — 26.3% at nonselective schools, 14.6% at selective schools— while STEM majors at selective schools (12%) and business students at selective schools (11.5%) defaulted at the lowest rates. Overall, default rates among students who majored in business or a vocational programs were closer to STEM students than to arts and humanities majors.
Arts and humanities majors defaulted at higher rates regardless of the college’s selectivity, but if students majored in STEM, business or a vocational program, selectivity may have factored in more. By age 33, the default gap between students who chose a best-performing major and a worst-performing major was three percentage points at selective colleges, while at nonselective schools the gap was eight percentage points.
Advantaged vs nonadvantaged
The Fed’s analysis took a look into defaulters’ income and family background, too. The analysis looked at the average income for the ZIP code area at a borrower’s youngest available age based on available loan data. The analysis defined students who came from households earning below the mean income based on ZIP code as nonadvantaged, and students from households earning above the mean income.
The analysis found borrowers who came from less-advantaged backgrounds based on income had higher default rates no matter what type of college they attended.
Taking both a borrower’s background and college into consideration, the widest gap in default rates observed in the analysis were among advantaged students who attended private nonprofit colleges (13% of whom defaulted by age 33) and nonadvantaged students who attended private for profit colleges (42.1% of whom defaulted by age 33).
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