Default is bad news for both borrowers and lenders. It can lead to damaged credit, garnished wages (for defaulting on federal loans), not to mention a mountain of stress. And while large lenders don't suffer the same strain as the individual in default, it's still bad for business since lenders lose an income stream and may become involved in lengthy legal actions if they attempt to collect the debt.
The reasons for lack of payment are varied: Sometimes it's economic hardship, sometimes it's lack of knowledge about how loan repayment works. Sometimes loans are simply forgotten about in the haze of post-school transitions. Whatever the cause, delinquent student loans aren't a rarity. For those who entered repayment in 2005, 57 percent have had periods where they did not make expected payments, according to the study.
The paper attempts to isolate borrower characteristics that help determine who is more likely to default on their student loans, though it doesn't go into detailed explanation of why some are more likely than others. The most significant discrepancies occurred among racial groups. Ten years post grad, black borrowers were more likely to be in default, owed 22 percent more on their loans, and had defaulted on 11 percent more loans than their white counterparts. The repayment habits of Hispanic borrowers more closely resembled white Americans, while the habits of Asian Americans more closely resembled blacks, with the exception that most defaults in the Asian group occurred after a larger portion of debt had been repaid.
There were also some differences when it came to majors. Ten years after graduating, engineering majors owed less than those who majored in social sciences or humanities. Humanities majors were the biggest culprits when it came to nonpayment and business majors were least likely to default on their debt.
The economy, to be certain, is a part of the issue: An unstable job market makes it more difficult to make payments consistently as grads struggle to find employment, are underemployed, or face layoffs. The larger amount of debt that modern grads carry, which can make repayment challenging even for someone who is working full time (but still earning meager wages), also plays a part. According to the repayment estimator provided by the Department of Education, a student graduating from a four-year, private, for-profit university can expect to owe an average of $34,722 and have a monthly bill of $350 in standard repayment.
Post-school income alone is not the tell-tale factor as to who won't make their loan payments. In the study, both low-income and high-income borrowers defaulted on their debt. What did play a role, particularly for low-income borrowers, was financial support. "Borrower income has small and statistically insignificant effects on the likelihood of repayment problems for those with modest savings and access to family assistance," the study found. Among low-income borrowers without savings or financial help from their families, 59 percent faced difficulty repaying compared with less than 5 percent of low-income borrowers who had both savings and family assistance.