Breaking down the student loan “crisis”

Many believe that we have a student loan “crisis” on our hands. And indeed, the total level of outstanding student loan debt – $1.4 trillion at present – is striking. However, cumulative numbers like this, generally presented as evidence of the “crisis,” actually tell us very little about the actual impact of loans and debt on individual students.

In October of last year, the federal government released new data on student debt and repayment that offered the most comprehensive picture yet of exactly who is having trouble paying back their student loans, and at which type of institutions, allowing us to take a more nuanced look at the student loan landscape. The picture is both better and worse than most people think.

The for-profit sector is responsible for much of the damage

What primarily jumps out from this new set of data is the outsized role the for-profit sector plays in the student loan “crisis.” While 17 percent of all students that began college in 2004 had defaulted on their loans within 12 years of college entry, a full 47% of students that started at for-profit colleges had defaulted within that same time span. Based on existing default rates and patterns from past cohorts, Judith Scott-Clayton of the Brookings Institution projects that 70% of the 2004 for-profit cohort will default by 2024.

In other words, if we do have a student loan crisis on our hands, it’s for-profit colleges that are driving it.

Graduation and four-year degrees really matter

Susan Dynarski, an economics professor at U of M, has written for years that what we see as a student debt crisis is actually more of a college completion crisis. It turns out that those that get into trouble paying back student loans generally don’t have a lot of debt – because they didn’t spend enough time in college to complete their degrees. So they leave college with a relatively small amount of debt, but with no credential to help them earn a wage premium in the labor market. College graduates tend to carry more debt, but are earning enough that they have little trouble paying it off.

This new data again emphasizes the importance of graduation, and the importance of earning a valuable credential. Of the 2004 cohort, just 5.6 percent of students who attained a bachelor’s degree defaulted on their loans within 12 years. This is three times lower than the rate for all students, and reflects the fact that the bachelor’s degree wage premium continues to rise, enabling BA holders to easily pay back their loans.

These same positive outcomes do not hold for those that earn an associate’s degree or occupational certificate. 14 percent of the 2004 cohort that earned an associate’s degree defaulted within 12 years, and 28 percent of those that attained a certificate defaulted, despite average loan burdens far lower than for those who earned a bachelor’s degree. This is driven both by greater participation by for-profit institutions in the sub-baccalaureate space and uneven returns for sub-baccalaureate credentials.

Regardless, the higher rates of default among sub-baccalaureate completers is an important finding. The risk of student loan defaults is often cited as a reason students should avoid attending a more expensive four-year institution, and opt instead for cheaper two-year schools. This data suggests that passing on a four-year school may in fact be the far riskier option.

Black BA holders

The most disappointing finding from the data was that the low default rates for those that earn a BA do not hold for black students. While just 4 percent of white BA holders defaulted within 12 years, 21 percent of black BA holders did, an unacceptably high number.

What’s driving the high number of defaults? Evidence suggests that black recent-graduates face discrimination in the labor market, with an unemployment rate double that of white recent-graduates. Black students are also more likely to attend lower-selectivity colleges, whose alumni experience lower earnings and higher default rates.

But a major factor also appears to be patterns in graduate school borrowing among black college graduates. Perhaps because of relatively poor labor-market outcomes, black college graduates are now more likely than white college graduates to attend graduate school, a relatively recent phenomenon. But the increase in graduate school attendance among black college graduates has been almost entirely driven by attendance at for-profit graduate schools, with almost 30 percent of all black graduate school students attending a for-profit institution.

As is the pattern in the rest of the for-profit sector, these students borrow significant sums to attend these institutions, yet see little return on their investment in the labor market.

Counseling, counseling, counseling, and counseling

The reason I keep putting scare quotes around the word “crisis” in this post is because taking out student loans shouldn’t be all that scary. Yes, college needs to be far cheaper, and we need to commit dramatically more public funds to make it cheaper. But under our current system, in which a a four-year college is really expensive, yet offers the best pathway to good-paying work, loans are a necessary tool to give all students access to higher education. And scaring students away from taking on debt makes it less likely that they’ll attend college, less likely that they’ll persist, and less likely that they’ll graduate. This is a problem because even if a bachelor’s degree doesn’t guarantee economic success, it certainly offers a far better chance of being employed in a good-paying job than other potential paths.

What’s needed instead is more and better counseling at all stages of the college process. This means counseling high school students into colleges with high graduation rates and good financial aid; counseling students to take on appropriate levels of federal student loans; counseling students to persist through to graduation; and then counseling them to enroll in income-based repayment systems to prevent loan defaults.

The right kind of loans, for the right kind of education, can be the best investment of a student’s life. It’s our job to make sure that it is.

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Patrick Cooney

Patrick Cooney is Vice President of Michigan Future Inc., a non-partisan, non-profit organization. Michigan Future’s mission is to be a source of new ideas on how Michigan can succeed as a world class community in a knowledge-driven economy. Its work is funded by Michigan foundations.

This Post Has 7 Comments

  1. I It is not surprising to me at all that for profit schools have a much higher student default rate. I assume a few for profit schools do a good job, but the majority don’t. Their motivation is different
    than it is for state, private not for profit and religious schools. The for profit schools are motivated to earn as much profit as possible for the owners. This can lead them to push inappropriate loans that will attract student who have no other way to finance college. These students are very likely to default.

  2. You mentioned that a relatively high percent of community collage graduates who earn associates degrees also default. What about community college graduates who continue their education at a four year college to earn a bachelors? That option can save lot of. money and debt for a student.

    1. Hi Don – thanks for the comment. I imagine you’re right, that those who start at a community college, transfer to a four-year, and end up attaining a BA have low levels of default, as they probably have a low loan burden and are receiving a wage premium in the labor market. The problem, however, is that the vast majority of students who start at a community college never end up attaining a four-year degree. Research from the Community College Research Center at Columbia University has found that over 80 percent of students entering a community college have plans to transfer to a four-year and earn a bachelor’s degree, but only 16 percent of students actually have earned a bachelor’s degree six years later (

      Those students that do end up transferring, however, do end up graduating at relatively high rates, particularly those students who earn an AA first.

      1. Has any research been done about why students who attend a community college first with the intention of transferring to get a 4 year degree, are so likely to not to earn a bachelor’s? Is it because community colleges do a poor job preparing them? Or is it because students who are already less likely to complete a 4 year degree are also more likely to go to community college first?

        1. It’s a bit of both. Thomas Bailey, the director of the Community College Research Center, has done a lot of work on this issue ( There’s no question that many of the students who enroll at community college are not college-ready, and end up getting stuck in remedial courses that they never end up passing, and drop-out. But research suggests that another major obstacle is the lack of coordination between community colleges and four-year colleges. Many transfer students find that many of their community college classes aren’t counted for credit at the four-year colleges they transfer to, resulting in wasted time and money that the student then needs to make up. This is true even in states with some form of articulation agreement between the two sectors.

          In sum, however, completion rates for those students that do transfer aren’t terrible – roughly 60 percent of those that transfer end up earning a BA. The bigger problem is that about 25 percent of students actually end up transferring from a two-year to a four-year, despite the fact that the vast majority intend to at the outset.

  3. HI Lou. We’ve certainly have talked this topic for years and have done little of nothing in offering solutions or guidance to students wanting to go to college or post HS programs. How about posting the college costs on a chart for comparison to assist in making college choices and loan applications. Awhile back scholarship funding was available from a variety of organizations for some assistance, are these resources still available?

    One point not mentioned is that living at home lightens the room and board expense leaving just the tuition to manage plus books and possibly transportation. We need a work sheet to help see the true picture . Dean

    1. Hi Dean – thanks for the comment. You’re certainly right that more clarity is needed around the financial aid process. When we were working with high schools in Detroit, we tried to highlight those institutions that gave generous need-based aid (reducing the loans a student would have to take out), and draw a distinction for students between “good” loans (federal direct loans with low interest rates and a borrowing limit) and “bad” loans (on the private market or Parent PLUS loans with no borrowing limit).

      And you’re certainly right that living at home can reduce the cost. However, a lot of research has shown that it also makes it less likely a student will end up graduating, as obstacles like transportation or pressures to help at home increase the time to degree.

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