Protecting yourself

Student loan problems come to light with new research

Fred Williams

Higher education can be a risky investment, but researching a school’s default rate on student loans can help save you from pursuing a costly, dud diploma.

New research this week from  Federal Reserve economists sheds light on who has the hardest time repaying their student loans: People from lower-income backgrounds who ended their schooling in 2009, during the depths of the Great Recession.

“This is the very group of borrowers that student loans are supposed to help,” said Donghoon Lee, research officer at the Federal Reserve Bank of New York.

Lee was among a group of researchers who presented the results of their study, based on credit reports and demographic data, in a press conference Thursday. They found that people whose schooling ended in 2009, and who were from areas with under $40,000 in yearly average income, had a harder time repaying student loans than others.  

Of this group, 70 percent were struggling with their debt load, even five years after leaving school. The number includes borrowers who were behind on payments, plus others who were not yet in default, but were making no progress paying down their debt.

The study comes as struggling borrowers grow more restive about their plight. Some students lured into costly programs by Corinthian Colleges, for example, are protesting by refusing to pay back their loans. The for-profit college is winding down its programs under an agreement with the U.S. Education Department, which sanctioned it for lying about job placement rates.

“I think it is really up to the students to take a look at the schools, especially in the for-profit world,” said Alegra Howard, student loan expert at the advocacy group Consumer Action. “As we learned with Corinthian, the more data you can get from an outside source, the better.”

People from a lower-income background are more likely to seek a trade school that will qualify them for a better-paying job quickly, rather than a four-year or even a two-year program, she said. That means they are looking more often at private, for-profit programs, where promises often outstrip results — which may partly help explain why this group has the most difficulty repaying student loans.

To avoid investing time and money into a dubious program, students can find key information about a school’s performance on College Navigator, a website from the U.S. Education Department. In addition to costs for tuition and fees, the site lists schools’ default rates on student loans.

“You can look at what percent of students graduate, what percent are delinquent, and how many are paying back their loans,” Howard said.

That information, gleaned from federal data rather than the school’s marketing brochure, is especially important when a school is recruiting aggressively, she said. “A lot of these for-profit colleges have recruiters that may be calling you and promising things.” People working a couple of low-paying jobs are especially susceptible to recruiters’ promises of a high-paying job that will allow them to support a family, Howard said. However appealing the vision of a quick route to a new, better life, checking the facts is required.

Difficulty repaying student loans isn’t only the result of bad-apple schools, however. Only 37 percent of borrowers are paying down their loan balance, the Fed researchers found. Most are seeing their obligation increase, if they haven’t already slipped into default.

The highest default rates are on relatively small balances — often the result of students bailing out before finishing a program. These students “went to school for a semester or two and realized it wasn’t for them,” said James McAndrews, director of research at the New York Fed. “So they were left with the debt, but without a degree.”

Because repayment rates are so low, the total burden of student loans — now past $1 trillion — will keep growing, even though fewer students are borrowing than in past years. The number of “active” borrowers, those in school now, is down to 9 million, after peaking at 12 million in 2010.

And the debt will weigh on people long after leaving school. These days, two-thirds of balances hang over people who are no longer in their 20s. Said Fed researcher Andrew Haughwout, “Borrowers in their 30s and 40s have the highest debts.”

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