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The spike in student loan defaults over the last decade has been fueled by students attending for-profit colleges and, to a lesser degree, community colleges, according to a new analysis of millions of federal student loan records.
The paper, released Thursday as part of the Brookings Papers on Economic Activity, argues that the student loan crisis, to the extent there is one, is concentrated only among these “nontraditional” borrowers at for-profit and community colleges.
As students flocked to those institutions during the recession, they accounted for a huge surge in loan borrowing and the subsequent defaults on the loans as they faced poor job prospects and low earnings, the report says.
In 2011, the study found, borrowers at for-profit institutions and community colleges represented almost half of all federal loan borrowers leaving school and starting to repay their loans, but they accounted for 70 percent of defaults.
Meanwhile, their counterparts who attended four-year public and private colleges fared comparatively well during the recession. Such “traditional” borrowers, the report says, tended to come from wealthier families and ended up doing far better in the job market, even though they took on the largest amount of loan debt.
“Our work suggests that weak economic outcomes and poor loan performance are concentrated in certain sectors where institutions have not been held accountable for the outcomes of their programs either through market mechanisms or regulatory oversight,” write the two researchers, Adam Looney of the U.S. Department of Treasury and Constantine Yannelis of Stanford University.
The study is an unusually sweeping analysis of the federal government’s student loan portfolio going back several decades.
“This is probably the best picture of long-term student loan trends we’ve seen in a long time,” said Ben Miller, senior director of postsecondary education at the Center for American Progress.
Looney and Yannelis examined the records of some four million student loan borrowers that are buried in the U.S. Department of Education’s computer systems, and paired that data with earnings information from tax records as well as demographic information the borrowers provided on their federal student aid application forms.
Portrait of Student Loan Distress
The study also paints a much more distressing portrait of the federal government’s loan portfolio than other publicly available information has suggested.
The federal government each year publishes default rates based on a three-year period after borrowers are supposed to start repaying their loans.
Critics of that metric have long said it severely understates how much borrowers are struggling to repay their loans. And the report’s look at default rates over a longer period of time -- as well as at other, more detailed measures of how borrowers are able to repay their debt -- appear to confirm those concerns.
The researchers calculated their default rates differently from the current federal methodology. They extrapolated the rates based on a sample of 4 percent of federal student loan records and based their calculations on individual borrowers rather than loans (federal rates are based on loans, which means some borrowers may be counted in multiple cohorts).
Nonetheless, their default rates tell a much different story than the federal rates do.
For example, across all types of institutions, 28 percent of federal borrowers who entered repayment in 2009 defaulted within five years, the highest such rate since 1993, according to the study. Broken down by sector, borrowers who were students at for-profit colleges fared the worst (47 percent defaulted within five years), followed by those from community colleges (38 percent), and those from nonselective public and private four-year institutions (27 percent). Selective four-year institutions had a 10 percent default rate.
The researchers also calculated the five-year student loan default rate for some institutions.
ITT Educational Services, which owns ITT Tech, had among the highest rates, according to the report. More than half -- 51 percent -- of ITT borrowers who entered repayment in 2009 had defaulted five years later. That cohort of borrowers collectively made no progress in repaying their loans, according to the study; their aggregate loan balance was actually 1 percent greater in 2014 than it was when they started repaying in 2009.
A spokeswoman for ITT, Nicole Elam, said in an email that “the report makes clear that the borrowing trends and challenges likely had more to do with the Great Recession than anything else.”
“The real story is that the Great Recession hit graduates of for-profit and community college programs the hardest,” she said.
The University of Phoenix, one of the nation’s largest institutions, had the most outstanding federal student loan debt, with 1.1 million borrowers collectively owing $35.5 billion in 2014. Among a 2009 cohort of University of Phoenix borrowers, the researchers estimated, about 47 percent had defaulted within five years.
Officials at the Apollo Education Group, which owns the University of Phoenix, pushed back against the study.
“These researchers failed to acknowledge our students' significantly improving rate of default due in part to University of Phoenix support systems and services designed for working adult students,” Mark Brenner, the company’s senior vice president for external affairs, said in a statement. “They also failed to acknowledge our 2012 draft three-year cohort default rate of 13.6 percent.”
Beyond default rates, the study found skyrocketing rates of negative amortization on federal student loans, most significantly at for-profit colleges. Among the most recent cohort of for-profit college student borrowers, nearly three-quarters had made no progress paying down their loans within two years; they owed more than when they started repaying.
The new analysis about the performance of federal loans comes as lawmakers in Congress are weighing different metrics for holding colleges accountable. A bipartisan bill introduced earlier this year would eliminate student loan defaults as a factor and instead shift to measuring repayment rates.
