Student Loan Defaults in Texas: Yesterday, Today, and Tomorrow
Policy Implications
Summary
The 203 recommendations from the 1988 SDI conference can be grouped into three major categories: (1) improve communication, (2) limit borrowing for at-risk students, and (3) provide proper incentives for repayment and disincentives for default.
Most of the proposals addressing communication issues were adopted. Students now benefit from access to loan counseling at matriculation and graduation, can download information and forms from the Internet, and must be informed by student loan participants at key moments in the life of the loan. Among student loan partners, communication has improved with changes in technologies and customer demand for standardization and high-quality customer service. Even organizations not directly involved with student loans now routinely share information with TG, thereby improving the operation of the student loan program in Texas.
One way to reduce defaults is to limit who can borrow and how much debt they can assume. Balancing this restriction with the desire to promote equal access to higher education can be challenging. SDI conferees made several recommendations which sought an equitable balance. Measures designed to reduce defaults among early dropouts — e.g. late disbursements, multiple disbursements, and freezing loan limits for first-year borrowers — did not seriously compromise access to college.
Conferees offered numerous suggestions for structuring a system of incentives and disincentives for students. While not all proposals were adopted, several were, and word about the negative consequences of default has reached students. Positive incentives have also been effective. Lender-provided interest rate discounts for good repayment history provides tangible rewards to students who repay regularly.
“Section III: Historical Trends” documents the impact of these and other default prevention measures on loan volume and default rates. Today’s default situation is far different than it was in 1988. Defaulters are now much more likely to have attended a four-year school instead of a proprietary school. This paradigm shift has implications for the types of strategies to employ to lower defaults.
“Section IV: Predicting which Borrowers Will Default” analyzes the characteristics of defaulters today. The use of logistical regression provides a way to systematically sift through the data to pinpoint those characteristics most strongly associated with defaults. Academic progression was a key determinant of whether or not a borrower will default. Persistence through college greatly enhances the likelihood that the student will be able to repay his or her loan. School type was another important factor. The proprietary school experience appears to have a negative effect on default behavior holding all other currently measurable characteristics constant. So, too, for schools with past cohort rates that are high. However, the quantitative model suffers from a lack of data on potentially significant factors.
In-depth interviews were conducted to supplement the quantitative model. These interviews highlighted several important dimensions of the issue of defaults:
- Finding and holding a job are extremely important factors affecting one’s ability to repay loans.
- Among repayers, a deep personal commitment to repaying one’s loan was very noticeable even among borrowers who have had traumatic life experiences that might have driven other people into default.
- While many borrowers were able to withstand a traumatic life experience (e.g. job loss, large medical expenses, a new dependent, divorce, incarceration, etc.), multiple traumatic experiences often helped send borrowers into default.
- Repayers tended to have a much better understanding of their loan options than defaulters.
Policy Implications
1. Defaults are not confined to one school sector.
In 1988, it was easy to consider defaults largely the problem of one school sector. Default rates at proprietary schools were extremely high and reports of abuses widespread. However, today defaults are not clustered in one school sector. While default rates at proprietary schools remain higher than in other types of schools, the rates are much lower than during the peak of proprietary school borrowing. Loan volume at proprietary schools has been significantly reduced by cohort default rate sanctions and school closings. The problems associated with defaults can no longer be reduced to overzealous recruiters who exploit welfare recipients by charging outrageous tuition for inferior training that leads to dead-end jobs. Defaults are more likely to occur at four-year schools that have the most loan volume and lowest default rates — good schools with some students who get into trouble with their loans. The policy response to the current default environment would not attempt to put schools out of business with harsh sanctions, but would search for ways to lessen the problems of a minority of students. One way might be to better inform borrowers of the availability of deferments and forebearances to help borrowers through life’s rough spots. At some schools, the issue of debt burden is emerging. For a detailed analysis of student loan debt burden in Texas and the policy implications which arise from recent changes in debt levels, see Education on the Installment Plan: The Rising Indebtedness of Texas Borrowers, a report by TG.
2. The need for wise educations investments.
In general, investing in a college education pays off handsomely. Student loans are a good way for most students to finance their educational investment. The full cost is deferred and spread-out over a number of years as one would with any other investment with long-term benefits. Loans allow students to limit or eliminate the need to work while in school freeing up more time for study and integration into campus life, which are essential for academic success. With this success, students become economically more productive and flexible. For students with few financial resources, loans may not be an effective means to open access to higher education. But by and large, student loans are excellent financing tools.
To lower defaults, it is important to maximize the benefit of a college education by investing wisely. Students need to carefully select schools on the basis of the estimated return on investment. Students should be provided with information that will allow them to consider the performance of schools based on various measures, e.g. retention, graduation, and default rates; placement rates; and starting salaries of graduates. Part of this investment decision should involve choosing fields of study with clear expectations of the labor market for related occupations. A prudent investor would also want to select a high quality school at a reasonable price.
Academic success makes the overall public subsidy/investment yield higher returns. Neither the public nor students benefit when students do not complete their program of study. While there will always be an element of risk in going to college, public policies which promote academic progress will increase the common good.
3. Limit borrowing for students most at-risk of defaulting.
Both the econometric model and the anecdotal evidence from the in-depth interviews seem to confirm the connection between dropping out and defaulting. Measures which limit borrowing for early dropouts — such as late and multiple disbursements and low loan limits for first-year borrowers — appear to be sound, provided that schools actually have a problem with early dropouts. These measures can be administratively burdensome and cause hardship — perhaps even forming barriers to college for some students. If schools show that early dropouts are rare on their campuses, then the problem that these limiting measures seek to address would appear to be minimal.
Both the U.S. Senate and the House bills reauthorizing the Higher Education Act, currently being considered by the Congress, increase the authority of financial aid administrators to place limits on borrowing for some students. This power may prove to be an effective way to reduce defaults associated with imprudent borrowing. The exercise of this authority should be monitored to ensure that access is not compromised and that it is not used in an arbitrary or discriminatory way. Financial aid professionals will want access to relevant research in setting their policies, and it is hoped that this report can be of assistance to them.
4. Promote academic success.
While limiting borrowing for students at danger of defaulting may be wise policy, ultimately the challenge is to promote academic success. Students who progress to higher grade levels and complete their programs of study become more economically productive and less likely to default. Program completion is especially important for the more vocationally focused schools; failure to complete may mean the inability to become certified in an occupation, thus rendering the specialized training of little use. The longer-term, less specialized programs aim to create well rounded, critical thinkers. For these students, mere advancement to an additional grade level reduces the chance for default. Policies and services that promote college retention and persistence will have the added benefit of lowering defaults. Remedial education is essential for many students who can then become more successful in their core classes. Through in-depth telephone interviews we learned that students can go through major life traumas. Schools that provide support systems (e.g. adequate health insurance, childcare, counseling, etc.) can keep students progressing academically. Closely monitoring the overall progress of students can aid schools in identifying potential dropouts. Perhaps most significantly, schools that provide quality instruction will be better able to ensure the success of its students.
5. Help students find and keep jobs.
The transition from school to work can be hazardous. Efforts to smooth this transition will go a long way towards empowering borrowers and making them better able to repay their loans. Employment while in school may be beneficial, especially if the work is related to the student’s instruction and if the number of hours is low enough to allow for adequate study. A smooth transition to work is critical for students in vocational programs who are less able to be flexible in a rapidly changing economy. Providing students with quality labor market information will make expectations more realistic and better enable students to plan for the transition to the work world. Part of this planning should involve loan and personal finance counseling.
