A Look At Which Students Are Most Likely To Default On Their Student Debt

Since the early 2000's the amount of student debt outstanding has grown exponentially, along with annual tuitions, and now stands at nearly $1.5 trillion.  Moreover, and not terribly surprisingly, defaults on that growing mountain of student debt have also surged as graduating students quickly discover that they just dropped $200,000 on a near-zero ROIC investment.

Student Debt

But while a lot of attention is given to the growing default rates on this particular future economic disaster in the making, less time is spent trying to understand which students are most susceptible to default.  That said, the following series of charts from the Federal Reserve Bank of New York help to shed some light on that particular topic.

To our complete 'shock', students attending the nation's predatory for-profit colleges, with their aggressive lending programs, are almost twice as likely to default on their student loans than those attending non-profit schools. 

Student indebtedness has grown substantially, increasing by 170 percent between 2006 and 2016. In addition, the fraction of students who default on those loans has grown considerably. Of students who left college in 2010 and 2011, 28 percent defaulted on their student loans within five years, compared with 19 percent of those who left school in 2005 and 2006. Since defaulting on student loans can have serious consequences for credit scores and, by extension, the ability to purchase a home and take out other loans, it’s critical to understand how college and family characteristics correspond to default rates.


Interestingly, though the difference in default rates between two- and four-year private college students is not large (less than 5 percentage points at age thirty-three), this is not the case for public college students. Default rates for community college (two-year public college) students are nearly 25 percentage points higher than those for their counterparts in four-year public colleges. The chart below also shows that while for-profit students have the highest default rates, the default rates of community college students are not too different from those of for-profit students (36 percent versus 42 percent for two-year and 39 percent for four-year for-profit students, respectively, at age thirty?three).

Meanwhile, in another total shocker, "Arts/Humanities" graduates were seen to be way more likely to default than engineering majors...

In analysis not reported here, we find that Arts majors have the highest overall default rates, while STEM majors default at the lowest rates. Both Business and Vocational majors default at higher rates than STEM majors, but at rates closer in magnitude to STEM majors than to Arts majors. Next, we separate students not only by major, but also by school selectivity; the chart below presents patterns at age thirty-three. We find that students attending nonselective colleges have higher default rates no matter what they study. Arts majors have the highest default rates regardless of college selectivity, but major matters much more among students at nonselective colleges: the gap in default rates between the best performing major and worst performing major is much smaller (3 percentage points by age thirty-three) among students at selective colleges than among students at nonselective colleges (8 percentage points by age thirty?three).

...and dropouts are nearly 3x more likely to default than students who finish their degrees.

Finally, students who can depend on mom and dad to take over student loan payments when they get 'triggered' by their boss and decide to quit are less likely to fall behind on payments than students who lack that safety net.

In the chart below, we group debt holders by our family background measure, as well as by college type. We find that within each college type, students from less-advantaged backgrounds have higher default rates than their peers from a more-advantaged background. There is a nearly 30 percentage point difference in default rates between the group with the highest default rates (private for-profit students from less advantaged backgrounds) and the group with the lowest default rates (private not-for-profit students from more advantaged backgrounds). However, public college students from more advantaged backgrounds default at nearly the same rate as private not-for-profit students from less advantaged backgrounds (about 20 percent by age thirty-three). As before, at every age, for-profit students have the highest default rates, and students from less advantaged backgrounds attending for-profit colleges default at an even higher rate.

Of course, while the NY Fed didn't address the topic, somehow we suspect that default rates are also highly correlated with the percentage of student debt spent on binge drinking spring break trips to Cancun...just a hunch.