African-American undergraduate loan borrowers are twice as likely as whites to default within 12 years. That’s across all institutions (49 versus 21 percent). Hispanic borrowers fall in between with 35 percent defaulting. Asian and Pacific Islander borrowers are least likely to default at 13 percent. More than one out of four (26 percent) undergraduate student loan borrowers at public two-year institutions default within 12 years. That’s better than the majority of borrowers at for profit institutions (52 percent). But, worse than their counterparts at four-year institutions (19 percent at both private non-for-profit and public institutions).
What accounts for the black-white gap in student loan defaults? To find out, the author of a new Brookings Institution report analyzed a number of default rate predictors. Despite the “predictor” name, the author cautioned that these were measures of correlation and not causation. The predicators fell into several categories, including student and family background characteristics, undergraduate borrowing, institution sector and selectivity, college performance and attainment, as well as measures of employment, earnings, and debt-to-income ratios. Specific student and family background and characteristics predicators include race, gender, age, dependency, income, and parents’ education.
All things considered race, not college, matters
The analysis found that “while four-year college borrowers have lower unadjusted default rates than public two-year college borrowers, this advantage is completely eliminated after accounting for differences in student and family background across sectors.” The same cannot be said of borrowers at for-profit institutions where a 14 percent difference remained after adjusting for these factors.
All things considered, SAT and ACT scores are not significantly related to default, whereas GPA is correlated with default; for every point in GPA there is an 8 point decline in default rate. The amount borrowed is found to be negatively associated with default as evidenced by a 4-point lower default rate for every additional $10,000 borrowed, even factoring in attainment.
Adjusting for student and family background characteristics, even pre- and post-college performance (i.e., SAT and GPA) and outcomes (i.e., highest attainment, employment status, household income), a wide gap remains in the default rates between African Americans and white borrowers. These factors explain about half of the differences in the default rates of African American and white borrowers. These same factors explain more than 80 percent of the gap in defaults between Hispanic and white borrowers and none of the Asian-white gap.
Speculating about what could explain the remaining gaps in default, the author lists a few factors, such as better measures of income and other post-college financial factors, more information about the timing of repayment, as well as quality of loan exit counseling or loan servicing.
No gap in default resolution
As detrimental as default is to the defaulter – lower credit rating, difficulty accessing credit, rent, employment, revocation of license in some states, and garnishment of wages – the report points out that “default is a status, not a permanent characteristic.” Further analysis reveals that a majority of borrowers both white and black (54 and 53 percent, respectively) who default, resolve the default within 12 years. The two groups differ however, with respect to the manner in which they resolve the default. Of the four ways to get out of default – rehabilitation, consolidation, paying off in full, or having loan discharged, black defaulters are more likely to use consolidation to resolve their default, while white defaulters are more likely to use rehabilitation or pay in full.
On a final note, the report states that “just because a student is not in default, does not necessarily mean they are paying down their loan…. A similar analysis of predictors of successful repayment would further enrich our understanding of student loan outcomes.” Ultimately, the more we know, the better informed the policies to improve student loan outcomes.
