The Urban Institute, a non-profit research institute, released a report on the trends seen with borrowers who are more likely to default on their student loan debt. As noted in the report’s executive summary, 250,000 federal loans go into default every quarter, with an additional 20,000 to 30,000 of rehabilitated student loans also re-defaulting.
The report used a random 2% sample of United States consumers from one of the three national credit bureaus. The report followed a set of borrowers from their first year of repayment in order to track trends before and during repayment as well as after default, anchoring on borrowers who began repayment in 2012.
The report found the following:
- The likelihood of default increases with the length of time the loan is in repayment. 1% of borrowers defaulted within the first year of repayment. This increased to 15% in the second year and 22% in the fourth year.
- Most defaults occur on lower balances. There is a 32% default rate for balances of $5,000 or less and a 15% default rate for balances of more than $35,000. However, the majority of borrowers fall into the low balance category.
- In the year prior to repayment, defaulting borrowers are less likely to have household debt (defined as debt that relies on underwriting or a credit risk assessment such as auto, mortgage, and credit card debt) but more likely to have medical and utilities debt. Non-defaulting borrowers were more likely to have household debt.
- Defaulting borrowers were more likely to have some sort of financial obligation in collection the year prior to repayment, usually on medical or utility debt.
- Using zip code data, the report found that those who default on their student loans were more likely to reside in neighborhoods with a less educated population and a higher population of black and Hispanic residents.
- There is a very strong correlation between a borrower’s credit score and their likelihood of default.
Pulling all of this data together, the report found that the likelihood of default on student loan obligations can be predicted by studying the borrower’s credit profile. According to the report, the best indicators of default include:
- The borrower’s credit score in the year prior to entering repayment;
- The type of debt held by the borrower prior to repayment (household debt versus medical/utility debt); and
- Whether the borrower has some sort of debt in collections in the year prior to repayment.
Based on this, the report recommends that policy makers investigate the effect of debt and collections obligations on student loan repayment, use credit scores to better target student loan repayment assistance, focus on discharge remedies that reach highest-need borrowers, and develop better measures of student loan acquisition and repayment.
This report provides information that may be useful for the Department of Education (ED) as it defines its enhanced servicing program. While ED has yet to define the specifics of the program, it stated in its cancellation of the solicitation for unrestricted Private Collection Agencies that the purpose is to "enhance engagement at the 90-day delinquent mark" in order to reduce the number of defaults. That 90-day mark might be a little late in the game if the factors that indicate default is likely are present as early as a year prior to repayment. If borrowers who default tend to have certain similarities, ED could focus its efforts on how to help borrowers in those situations avoid default before the situation turns dire -- while carefully avoiding any disparate treatment issues, of course.