What Accounts for Gaps in Student Loan Default, and What Happens After

Abstract

A substantial proportion of student loan borrowers default on their repayment within 12 years of initial college entry. Default rates vary dramatically by race/ethnicity and institution sector: Black entrants and for-profit entrants experience default at much higher rates than others. This Brookings Institution report examines whether these disparities can be explained by other factors and what happens after a default. Differences in student and family background characteristics, including family income and wealth, can account for about half of the Black-White gap in defaults. But even accounting for differences in degree attainment, college GPA, and post-college income and employment cannot fully explain the gap, which remains large and statistically significant at 11 percentage points in the most complete model. Similarly, differences in student and family background characteristics can account for nearly half of the gap in default rates between borrowers from for-profits and public two-year colleges. But the gap is not fully explained by differences in attainment, employment, or earnings. Entering a for-profit is associated with a 10-point higher rate of default, even after accounting for everything else in the model. Fifty-four percent of all defaulters resolved at least one of their defaulted loans via rehabilitation, consolidation, paying in full, or having a loan discharged. At least 14 percent emerged from default and re-enrolled in school. While there is no Black-White difference in resolution rates, White defaulters are more likely to rehabilitate defaulted loans, while Black defaulters are more likely to consolidate. Similarly, defaulters from for-profit institutions were more likely to consolidate and less likely to rehabilitate a defaulted loan than defaulters from public two-year institutions