Research of the Week: Who is Most Likely to Default on Student Loans?

Defaulters don’t exactly fit the “stereotypical portrait of a college student” that most of us imagine.

Each week, Consolidated Credit searches for financial research that can help you deal with your debt and budget. This week…

The interesting study

The Center for America Progress published an extensive study about which borrowers are most likely to default on student loans. They wanted to evaluate the 1 million student borrowers that default on about $20 billion in federal loans each year.

The big result

The average defaulter is not what you think of as a typical college graduate. The report states that, “Defaulters are more likely to be older, be Pell Grant recipients, and come from underrepresented backgrounds than those who never default.”

The fascinating details

• Median defaulter borrows more than half of what the median nondefaulter borrows
  • The median debt amount for defaulters is $9,600
• Defaulters don’t default right away
  • They use solutions like deference to delay the default
  • The median borrower defaults 2.75 years after entering repayment
• Many defaulters don’t have a solution to recover
  • 45% haven’t found a solution to bring the defaulted loan current
  • Of the 55% who found a solution, almost half paid off the debt, including collection costs
  • About 100,000 borrowers who default, default again each year
• Ethnic borrowers are not more likely to default
  • 44% of white students default
  • 30% of African American borrowers default
  • Only 18% of Latino borrowers default
• 4-year college students are less likely to default
  • Only 19% of public 4-year college students and only 11% of private 4-year students default
  • 31% of public two-year college students default
  • 38% of private for-profit students default
• If you receive a Pell Grant, there’s an 87% chance you will default
• Almost half of dropouts default
  • 49% of dropouts default, compared to 10% who attain a Bachelor’s degree
  • Dropouts don’t drop out immediately, they obtain about 41 credit before they leave
• Student loan defaulters also tend to have low GPA
  • Median GPA of students who default on student loans is 2.4

What you can do

Looking at the numbers, the students most likely to default are not attending 4-year colleges and earning Bachelor’s degrees. It’s student who attend 2-year and private technical colleges, many of whom drop out.

“Going back to school to advance your career is a smart choice, but you need to be extremely cautious about how you do it,” explains April Lewis-Parks, Financial Education Director for Consolidated Credit. “You must take time to vet the college, assess their graduation and job placement rates. Taking out loans for your education and then dropping out is extremely risky for your finances.”

Of course, that doesn’t help the 1 million borrowers currently facing default. So, if you’ve already defaulted, what can you do?

“You must be proactive in talking to your loan servicer about relief options,” Lewis-Parks says. “Loan servicers are required to provide information on federal repayment plans and loan forgiveness. However, you usually have to ask to get the information you need.”

There are programs specifically designed to help borrowers who have limited income and large volumes of debt. But government studies show only about half of the borrowers that are eligible for these solutions know they exist.

“The right repayment plan solution can bring any defaulted student debt that you have current immediately,” Lewis-Park encourages. “You can consolidate the debt and find payments that fit your budget, even if you don’t have any extra cash to spare. It just takes time to research these solutions.”