Regularly reported statistics about high and growing student-loan debt levels, combined with increased rates of delinquency and default, have prompted calls to address the student-debt “crisis.” For New England, with its highly educated population and large higher education industry, student-loan debt is an important economic policy issue. Over the past decade, all six of the New England states have established commissions, subcommittees or contracted studies focused on the subject. These efforts have yielded diverse recommendations.
Unfortunately, such policy discussions often lack detailed information on trends in state and regional student-loan debt. Further, they may lack data on which populations struggle the most with repayment of loans—information important to crafting an effective policy response. A new report by Federal Reserve Bank of Boston’s New England Public Policy Center—“Student-Loan Debt, Delinquency, and Default: A New England Perspective”—provides a more complete picture of the problem, finding among other things, that disadvantaged populations are most challenged with student-loan debt repayment.
The report reinforces a well-known statistic: It generally costs more than in other regions to secure a postsecondary education at a New England institution. This is a result of higher tuition rates across all types of institutions and a high concentration of students attending costlier private, nonprofit, four-year institutions. These factors explain why student-loan borrowers who attend New England institutions will probably carry higher debt balances than peers elsewhere. Indeed, the media and policymakers often point to larger average student-loan debt balances of those graduating with a bachelor’s degree in New England.
But the amount of student-loan debt is not the most important statistic to consider, and the reported average debt load may not pose a challenge for those who have earned a bachelor’s degree. The problem is as much about outcomes and earnings as it is about student-loan debt. Borrowing to pay for an education is not necessarily an issue if borrowers are obtaining credentials that yield higher earnings which support loan repayment.
New England fares better than the nation on institutional default rates and individual delinquency rates. This may be because of the quality of the region’s institutions or strength of its labor markets, but it could also reflect the characteristics of borrowers here. As a high-income region that is less diverse than other parts of the nation, borrowers attending New England institutions and New England residents paying student-loans here are less likely to come from disadvantaged backgrounds.
The New England region has the lowest default rate among all regions of the nation (7% compared with nearly 12% for the nation). Student-loan default occurs when a loan payment has been missed by 270 days and remains outstanding. Defaulting can result in wage garnishment, withholding of tax refunds and poor credit scores. Default rates are persistently low at most types of New England institutions. The exception for the region are default rates for borrowers at community colleges and nontraditional institutions (primarily for-profits), which is above 10%. Nationally, the populations attending these institutions also struggle with default.
The Center’s report show that the highest rates of delinquency is among borrowers with lower debt balances (below $25,000). In total, about 70% of borrowers and 75% of severely delinquent borrowers in the U.S. and New England had student-loan balances under this threshold. (Delinquency refers to missing a number of student-debt loan payments. Severe delinquency is defined as being over 120 days late on any student loan payment.) The borrowers who default on the lowest student-loan balances probably include a large number of borrowers who took out student loans and did not complete their degrees, leaving them carrying debt but having no resulting wage gains with which to make student-loan payments.
Still, repayment of student-loan debt proves a significant challenge for some New England residents. Considering student-loan debt by the characteristics of the neighborhoods where borrowers came from, those from low-income localities, neighborhoods with a higher share of minority residents, and areas with low levels of educational attainment have lower levels of debt but higher rates of delinquency.
Borrowers from disadvantaged neighborhoods tend to carry lower levels of student-loan debt but experience higher rates of severe delinquency than borrowers from other places. Plausible explanations for why this is the case include enrollment at lower-cost institutions with relatively weak outcomes, generally facing relatively poor labor market prospects, and having families with limited resources to assist with student loan debt payments.
Analysis of data provided by the Federal Reserve Bank of New York/Equifax Consumer Credit Panel shows that more than one in four students from a disadvantaged backgrounds or from a population underrepresented in higher education become severely delinquent on student loans.
The Center’s report discusses policies that could address this problem. These include educating student-debt borrowers earlier and more regularly about the terms of their loans and expected monthly payments after graduation. Such information was shown to reduce student-loan borrowing in pilot programs in other states. First-generation and disadvantaged students may benefit from counseling and guidance to help them understand financing options and support degree completion. The report also suggests that New England states might consider playing a larger consumer protection role through their authority to approve and renew the operations of higher-education institutions within their state’s borders or enroll state residents though online programs. The process generally focuses on reviewing the finances and programs offered by an institution; some states reserve the right to deny approval or renewal to operate if they determine that predatory enrollment practices are used. Including metrics on graduates’ labor market outcomes and loan performance into this process might further support student-loan holders attending New England’s schools.
Darcy Rollins Saas is deputy director of the New England Public Policy Center at the Federal Reserve Bank of Boston.