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Data Diving With a Student Loan Economist

Total student loan debt now adds up to more than $1.3 trillion — more than four times the size it was in the year 2000. It’s no wonder the word ‘crisis’ often follows in today’s reporting about education costs.

How did that $1.3 trillion come to be? Sure, tuition has risen sharply in recent years — but there is clearly more to the story.

To get a better understanding of who is holding this debt, we spoke with Constantine Yannelis, an economics PhD candidate at Stanford University and co-author of a significant new report on student loans released by the Brookings Institution in September 2015. He wrote the paper with Treasury economist Adam Looney.

According to their research, the reality of the $1.3 trillion student debt held by 40 million people in the U.S. is more nuanced than previously understood.

There’s no doubt in anyone’s mind that there is a crisis. But, as it turns out, it’s happening in a very concentrated way. The fastest growing group of borrowers are those who attended for-profit schools and community colleges — they also represent the majority of loan defaults.

top schools for borrowing comparison

There are many factors driving the rapid rise of borrowing to fund tuition at for-profit schools, but one piece of the puzzle is the federal lending program itself — while it’s designed to make college education accessible to all who want it, it also allows big borrowing without much evidence that the borrower will be able to repay.

growth in student loan borrowing in dollars

This is a particularly troubling point as this group of borrowers tends to come from families with lower income, who are from poorer neighborhoods, and who are first-generation students.

Looney and Yannelis’ report was based on federal student loan data representing 4 million borrowers between 2000 and 2011. It is the largest dataset ever used to examine student loan borrowing and includes details such as institution attended, earnings before and after college, and repayment history.

We spoke with Yannelis about the report’s key findings.

There has been a lot written recently about the growth in student loan debt, given that we now have 40 million U.S. borrowers with more than $1.3 trillion in outstanding student loan debt. Where is most of the debt today and how has this changed over the years?  

Debt has been split between traditional borrowers — who we define as those who borrow at four-year institutions — and non-traditional borrowers at for-profits and community colleges. But in recent years, the share of borrowers entering repayment in the non-traditional sector increased sharply, from 30 to 46 percent between 2000 and 2011. There was also a big surge in borrowing in the for-profit sector during the great recession, which is beginning to unwind.

percent growth in borrowing by school type

Note: While the share of all borrowers entering repayment who were non-traditional increased 46%, the above chart shows the overall percentage growth in number of borrowers by each school type.

Are students borrowing a lot more than they were previously?

Yes, in the paper we show that in 2000 the median borrower took about $14,000 in loans, and by 2014, this figure rose to about $20,000, all in 2013 dollars. This headline figure is actually smaller than the figure within school types because students have shifted into institutions where students tend to borrow less.

Which borrowers are defaulting on their loans? Are there implications here for the way underwriting is happening?

About 70% of defaults are in the for-profit and community college sector, despite the fact that these sectors account for a much smaller share of borrowers. Currently, there is no direct underwriting in federal student loan programs. It would be possible to implement some form of underwriting as defaults are to some extent predictable.

What are the prospects for students graduating today?

Our paper focuses primarily on borrowing and default outcomes, but there is evidence from our analysis and research by others that completion rates differ at different types of institutions. Our results don’t speak to whether this is due to the education production at different types of schools, or different types of schools enrolling different types of borrowers. What is clear is that individuals who attend more selective schools are more likely to graduate.

Borrowing money obviously has a cost, but what are the benefits to borrowing according to the data?

The benefits are also obvious in many cases — research has shown that education increases earnings for individuals and has a host of non-pecuniary benefits. Unfortunately, we can’t say much at this point about the returns to borrowing and the returns to education borrowers. We observe that individuals who borrow more tend to earn more, however, this is largely associated with the types of programs that people select.

For example, many students who go to medical or law school borrow a lot, but they also have high earnings. Other research by Christopher Avery at Harvard and Sarah Turner at the University of Virginia points out that for most students, if the choice is between borrowing and going to college, and not borrowing and not going to college, the returns to education make investing in college worth it.

Based on what you’ve learned from your research, what would you recommend to our readers?

I don’t want to make too strong a recommendation because every individual circumstance is different. For some people borrowing may be a good investment, for others it may not be depending on their skills and the type of degree in which they enroll. I would recommend that borrowers get informed about their own prospects and the institutions and academic programs they are evaluating, along with the rules of federal loan programs, repayment options as well as the costs of default which can be quite high.

The new college scorecard could be a good place to start to learn more about outcomes for individuals at different programs, and the Department of Education provides a lot of information about the rules of student loan programs.

The views reflected in this Q&A are solely those of Constantine Yannelis and do not reflect any organization.

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