High Unemployment Leads to More Student Loan Defaults

A blog post by Sean Brandon, originally published at Third and State.

The U.S. Department of Education recently released 2009 fiscal year data on the number of students defaulting on college loans. In a press release, the Department noted that the national default rate rose from 7% in 2008 to 8.8% in 2009, affecting loans for all types of colleges and universities. The default rate rose from 6% to 7.2% on loans for students at public institutions, 4% to 4.6% at private institutions, and 11.6% to 15% at for-profit institutions.

Among the states, Pennsylvania has the third highest number of higher learning institutions (behind California and New York) and a student default rate of only 6.6%, which is considerably better than the national rate. However, Pennsylvania is no exception when you compare the relationship between the unemployment rate and the borrower default rate.

Earlier this month, Rortybomb blogger Mike Konczal compared the default numbers of subprime mortgages with for-profit college loans. In his analysis, he drew attention to the relationship between unemployment and default rates.

The Keystone Research Center recreated one of Mike’s graphs below. It is quite clear that as unemployment rises, the number of students defaulting on their loan payments also goes up. Pennsylvania is the label highlighted in red.

The tough economic conditions have been particularly hard on young college graduates. According to an Economic Policy Institute briefing paper, “between 2007 and the most recent 12 months (August 2010 – July 2011), the unemployment rate rose from 8.7% to 14.7% for young black college graduates, from 6.6% to 13.5% for young Hispanic college graduates, and from 5.1% to 9.2% for young white college graduates.”

Too many of today’s graduates are left holding a diploma but not a job. As a result, they are unable to pay back the money they already spent getting the degree that was supposed to help them get a good job.

In order to make loan payments more affordable, the Obama administration initiated the income-based repayment plan (IBR), which has capped the monthly payment at an amount based on family size and income. For many young graduates without income, however, the IBR plan does very little.

The best way to lower the student loan default rate is to bring down the unemployment rate. Lawmakers need to incentivize companies to hire young graduates. If the unemployment rate rises in the next few years like it did in the last three years, then hundreds of thousands of young graduates will default on their student loan payments each year.