Which Students Are Most Likely to Default on Their Loans?

Posted By Eliana Osborn on March 22, 2016 at 10:07 am
Which Students Are Most Likely to Default on Their Loans?

When Larry S. took out student loans, he never thought his job would make them hard to pay back.  But as a teacher, he didn’t get paid during the summer months.  He could have planned better, but those ten paychecks didn’t go as far as he’d hoped.  So every year, he’d miss two loan payments and have to deal with angry calls from his loan provider.

One missed payment is all it takes to get behind – add in a second skipped deadline, and you’re in default.  The Washington Post reports that Larry’s experience is not an isolated one.  And those most likely to default on their student loans, according to a recent study, are middle class non-white individuals.

The Washington Center for Equitable Growth put out an interactive debt map in late 2015, allowing student loans balances to be examined based on county.  Their latest report uses this same data set to see how this geography has a racial component.  “Zip codes with higher shares of African Americans or Latinos show much higher delinquency. What’s more, our analysis finds that among minority student borrowers, those most adversely affected are the middle class—those who have taken out debt to go to college but who haven’t been able to find jobs or don’t have sufficient family wealth to pay it back.”

Those most likely to default aren’t those who have borrowed huge amounts of money.  It’s those with balances under $5,000, according to the Federal Reserve Bank of New York.  Areas of the country with low debt levels have high delinquency rates.  And those neighborhoods, data from Equitable Growth shows, are disproportionately minority.

If you consider community college populations, you can see one aspect of these default rates.  More minority students attend community college, and prices are low so less debt is needed to attend.  But earning an associate’s degree or certificate is often not enough to get a good job—one that will enable fast repayment of student loans.

Eduardo O. is like millions of college students across the country.  He started with big plans for college, despite a shaky high school experience.  He had family help for his first semester of college and didn’t take on any debt.  However, he failed half his classes, adjusting to the freedom of independent life.  He took the next semester off to save money.

Nearly two years went by before Eduardo finally enrolled back in school.  This time around, he applied for federal student loans and took out the maximum amount.  His bad credit rating didn’t get in the way of him receiving $11,000.  He ambitiously enrolled in Arabic, political science, and other classes for a degree in international business.  After that, he can’t really explain what happened, other than that he got overwhelmed.

Today Eduardo works at Walmart, has less than one year of college credits, and has not made a single payment on his student loan debt.  He’s almost stopped worrying about it, even though he knows his financial future is in jeopardy.  “There’s no way I can pay,” he says.

Few borrowers plan to default on their loans.  But the Equitable Growth research highlights the particular problem for African-American and Latino student loan holders.  Their unemployment rates, at all education levels, are double that of Caucasians.  Their college graduation rates are lower, too.  That means that zip codes with more minority households have higher delinquency rates.

Marshall Steinbaum and Kavya Vaghul, writing for Equitable Growth, explain: “Minority populations disproportionately suffer from high delinquency, and, within minority populations, the middle class seems most adversely affected. What can we make of these findings? We believe that these two facts reflect the impact of structural racism in the U.S. higher education system, credit and labor markets, and distribution of wealth.”

Larry was able to get back on top of his student loan payments each year and eventually earned more money, so missed payments weren’t a problem anymore.  Eduardo, however, is still delinquent on his loans—a status that won’t change even if he files for bankruptcy.

Eliana Osborn
Eliana Osborn is an associate English professor at Arizona Western College, with degrees from Brigham Young University and Northern Arizona University. She’s published widely in forums such as The New York Times, the Washington Post, the Christian Science Monitor, and the Chronicle of Higher Education.

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