Rising tuition costs aren’t driving default rates

For-profit colleges enroll 10 percent of US students but account for 50 percent of student-loan defaults. And low-income students are hit the hardest.

• By Howard R. Gold
• CBR – Public Policy
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A central driver of growing income inequality in recent decades has been the earnings premium commanded by those with technical skills, and a widening gap between college graduates and those with a high-school diploma or less.

Workers in the United States have responded by seeking college courses to improve their skills, and many have been drawn to for-profit institutions, which offer two- or four-year degrees or professional certificates in fields such as health administration, culinary arts, and cosmetology. But rather than enjoying an income boost, many graduates of for-profit schools have found themselves struggling to pay back student loans, and defaulting on their debts.

This has particularly affected nontraditional students, according to research by Harvard’s David J. Deming, Claudia Goldin, and Lawrence F. Katz. Nontraditional students tend to be older than 25 and often they are the first in their families to attend college. They tend to have lower family incomes than typical college students. They are disproportionately women and single parents. They are more likely to be Hispanic or African American.

Since for-profit schools offer fully online degree programs, and night and weekend classes, they are particularly appealing to nontraditional students, many of whom have families or work full-time jobs.

And for-profit colleges have played a significant role in driving the increase in student-loan debt in the US, suggests Chicago Booth’s Constantine Yannelis. For-profit colleges aggressively market themselves to nontraditional students, he argues. The colleges therefore disproportionately enroll higher-risk borrowers. Their higher fees saddle students with more debt than nonprofit colleges.

In research with Brookings Institution’s Adam Looney, Yannelis finds that nontraditional student borrowers as a proportion of all US students grew to become almost half of all new borrowers by 2011. Nontraditional students who had left school and started to repay loans in 2011 accounted for 70 percent of those who had fallen into default by 2013.

This dispels the notion that the chief cause of student-debt default is rising tuition. To be sure, college tuition rose almost 360 percent between 1985 and 2015, and graduates of professional schools, which boast some of the highest tuition rates, tend to owe the most. The median student debt of a new medical-school graduate was $190,000 in 2017, as reported by the Association of American Medical Colleges, while the average debt for graduates of US business schools was $70,000, according to the consumer-finance site SoFi, which derived the figure from 60,000 student-loan refinancing applications submitted between .

But despite their high tuition, elite private colleges and universities tend to have large endowments that enable them to offer grants to undergraduate students rather than loans. They also tend to enroll more students from wealthier families who can afford to pay full price.

Nor is the debt primarily caused by nonprofit public universities, which charge in-state residents, on average, two-thirds less than private colleges. The average debt burden for students at public schools is well below the national average.

Discounting those institutions led Yannelis to look at for-profit colleges, whose enrollment rose sevenfold from 1990 through 2010, and which, he notes, account for about 10 percent of enrollment, about 20 to 25 percent of borrowing, and approximately half of all loan defaults.

US student loans and defaults

Total outstanding student-loan debt in the US topped $1.5 trillion by the end of 2018, according to the St. Louis Federal Reserve. About 44 million people in the US owe money on student loans, with an average debt burden of $35,000. The volume of outstanding student loans rose 157 percent from payday cash loans Vermont 2007 to 2018, to become the second-largest category of consumer debt, after home mortgages. For some people, paying off student loans has become a lifelong burden. According to the Federal Reserve, 2.8 million people aged 60 and over have some amount of student debt, four times the number from 2005, and they owe $86 billion in student loans, the Wall Street Journal reported in .