Which Factors Affect Student Loan Repayment and Default Rates?

As student loan debt has surpassed $1.25 trillion, policymakers and members of the public are increasingly concerned about whether students are able to manage rising (but often still modest) loan burdens. The federal government has relied on a measure called cohort default rates—the percentage of former borrowers who defaulted on their loans within a few years of entering repayment—to deny federal financial aid access to colleges with a high percentage of struggling students. Yet default rates can be easily manipulated using strategies such as deferment and forbearance (which often don’t help students in the long run), meaning that default rates are a very weak measure of students’ post-college outcomes.

The 2015 release of the College Scorecard dataset included a new measure—student loan repayment rates, defined as the percentage of borrowers repaying any principal within a certain period of entering repayment. This gets at whether students are paying down their loans, which seems to be a more helpful indicator than relying heavily on default rates. But since repayment rates are a new measure, colleges had no incentive to manipulate repayment rates as they did default rates. This creates a research opportunity to examine whether colleges may have been acting strategically to lower default rates even as their students’ underlying financial situations did not change.

I teamed up with Amy Li, an assistant professor at the University of Northern Colorado, to examine whether the factors affecting loan repayment rates differ from those factors affecting default rates—and whether the factors affecting repayment rates varied based on the number of years after the student entered repayment. Our article on this topic is now out in the ANNALS of the American Academy of Political and Social Science, with a pre-publication version available on my personal website.

We used default and repayment data on students who entered repayment in fiscal years 2006 and 2007 so we could track repayment rates over time. Default rates at the time covered the same time period as the one-year repayment rate, while we also looked at repayment rates three, five, and seven years after entering repayment. (And we had to scramble to redo our analyses this January, as the Department of Education announced a coding error in their repayment rate data in the last week of the Obama Administration that significantly lowered loan repayment rates. If my blog post on the error was particularly scathing, trying to revise this paper during the journal editing process was why!) We then used regressions to see which institutional-level factors were associated with both default and non-repayment rates.

Our key findings were the following:

(1) Being a traditionally underrepresented student was a stronger predictor of non-repayment than default. Higher percentages of first-generation, independent, first-generation, or African-American students were much more strongly associated with not repaying loans than defaulting after controlling for other factors. This suggests that students may be avoiding default (perhaps with some help from their former colleges), but they are struggling to pay down principal soon after leaving college.

(2) For-profit colleges had higher non-repayment rates than default rates. Being a for-profit college (compared to a public college) was associated with a 1.7 percent increase in default rates, yet an 8.5% increase in non-repayment. Given the pressure colleges face to keep default rates below the threshold needed to maintain federal loan eligibility—and the political pressures for-profit colleges have faced—this result strongly suggests that colleges are engaging in default management strategies.

(3) The factors affecting repayment rates changed relatively little in importance over time. Although there were some statistically significant differences in coefficients between one-year and seven-year repayment rates, the general story is that a higher percentage of underrepresented students was associated with higher levels of non-repayment across time.

As loan repayment rates (hopefully!) continue to be reported in the College Scorecard, it will be interesting to see whether colleges try to manipulate that measure by helping students close to repaying $1 in principal get over that threshold. If the factors affecting repayment rates significantly change for students who entered repayment after 2015, that is another powerful indicator that colleges try to look good on performance metrics. On the other hand, the growth of income-driven repayment systems that allow students to be current on their loans without repaying principal, could also change the relationships. In either case, as colleges adapt to a new accountability system, policymakers would be wise to consider additional metrics in order to get a better measure of a college’s true performance.

Author: Robert

I am an a professor at the University of Tennessee, Knoxville who studies higher education finance, accountability policies and practices, and student financial aid. All opinions expressed here are my own.

4 thoughts on “Which Factors Affect Student Loan Repayment and Default Rates?”

  1. “The growth of income-driven repayment plans also weakens the relationship between default and repayment. Under income driven plans borrowers can make low or no payments while not paying down principal, thereby shielding borrowers from default but also lowering their repayment rates.”
    It seems a stretch to assert that all (or even many) of the borrowers on IDR plans who are making payments which don’t pay down principal are borrowers who would have defaulted (or even struggled) in the absence of IDR plans. One could just as easily argue that, in the absence of IDR plans, these borrowers would be doing what borrowers did for decades: some defaulting but many “tightening their belts” and (1) making standard, graduated, or extended payments (all of which are positively amortizing), although some of these borrowers unfortunately experienced periods in hardship deferment or forbearance until their wages could support regular payments.
    Furthermore, almost all the growth in IDR enrollment has occurred within the past few years. Assuming that at least some of this growth consists of early-career borrowers, are we also assuming that their wages will never increase over time.
    “Some colleges have encouraged students to place their loans in deferment or forbearance.” While there are quite a few harsh anecdotes in the sources cited, what is the real evidence here. 80 to 90 percent of deferments, according to published data, are for educational purposes, not for economic hardship or unemployment, so the deferment side of the story can be defused rather quickly. As far as forbearance, there appear to be other forms of CDR manipulation which are far more serious: frivolous CDR appeals for improper servicing and combining campuses for reporting purposes. http://ticas.org/sites/default/files/pub_files/TICAS_memo_on_CDR_evasion_082112.pdf. Removing the option of verbal hardship forbearance would appear to be a low-hanging fruit, as it appears to have been implemented via informal agency guidance and not specifically authorized by statute.

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