Economics Stack Exchange Archive

How are Student Loan defaults going to affect the US economy?

• posted by: user8077 on 2011-10-14
• tagged: loans
• score: -6

The default rate for US Student Loans is projected to reach 46.3% of all federal loans disbursed to students at for-profit colleges in 2008. There is no statute of limitations on these loans. How are the defaults going to affect the US economy?

See also: Huffington Post article.

[edit]

Education is one of the few things Americans still believe in. If the default rate gets too high there are many possible responses–especially since many of the loans not mentioned in the above article are not able to be defaulted on and have no statute of limitations.

Answer 274

• posted by: Jason B on 2011-10-18
• score: 1

I’ll use terms loosely here based on the pdfs you linked to.

The difference in default rates between for-profit and public/nonprofit higher-education systems implies that something is fundamentally different between these education systems (on average, I’m sure there are exceptions). Namely, students using the former system seem to default at a much higher rate. The article implies that this higher default rate is due to lower earnings (and less “gainful employment”) among for-profit alumni. It appears that policies may change to make it harder for students at some for-profit schools to get student loans. There are hints that the policy change might include some sort of institutional outcomes test–namely that for-profit universities that do not provide income-enhancing education might not continue to host loans.

It is difficult to provide an exact answer, but there are a couple of points I can make to think about the sorts of losses that might be implied by the defaults, and the consequences of the policy changes the defaults might inspire.

• The trend may reveal something more important than the direct effect of defaults. Namely, if we accept that education increases worker productivity, and that such productivity is reflected in wages, then the average graduate (exceptions noted) of these institutions is a less productive worker than the average graduate of a nonprofit or public institution. Then, insofar as students who would otherwise have attended a traditional institution are diverted to these private institutions, the productivity of the workforce is decreased. Some of these institutions are very large, and productivity losses accrue over the lifetime of their graduates.
• Economists think about private and social returns to education. The former is largely (but not entirely) reflected in increased wages. The latter returns derive from a set of benefits thought to be derived indirectly from an educated populace. It is the social returns that are often used justify public investment. If students who attend the for-profit schools would not otherwise seek higher education, then there may be some social benefits lost from no longer supporting them. The social benefits accrue over the lifetime of the students and beyond (due to inter-generational knowledge transfer within families).

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