America’s student debt crisis is worse than we thought

  • A new Brookings Institution report projects substantially worst student loan defaults than previous estimates.
  • The report predicts as much as 40% of students could be in default by 2030.
  • There are $US1.4 trillion in US student loans outstanding, making it the second biggest source of household debt after housing.

The US financial crisis that resulted from a ruptured housing bubble is now ten years old, and investors fretting over a serially record-setting stock market are searching for pockets of risk in various corners of the financial system.

The first spot they tend to look is at student loans which, while only a fraction of the housing market, can still have a significant economic impact on consumers and businesses.

A new Brookings Institution report offers startling results that suggest “the looming student default crisis is worse than we thought.”

The analysis “suggests that nearly 40% [of borrowers] may default on their student loans by 2023,” according to Judith Scott-Clayton, a non-resident senior fellow at Brookings and author of the report.

Brookings Student Loans

At nearly $US1.4 trillion in loans outstanding, student debt is now the second-largest source of household debt, after housing, and is the only form of consumer debt that continued to grow in the wake of the Great Recession, the report says.

The racial breakdown of the statistics is startling.

Debt and default among black college students “is at crisis levels, and even a bachelor’s degree is no guarantee of security,” the report says. “Black B.A. graduates default at five times the rate of white B.A. graduates (21% versus 4%), and are more likely to default than white dropouts.”

The worsening default pattern is most acute at for-profit colleges, the Brookings study said. Out of 100 students who ever attended one, 23 defaulted within 12 years of starting college in 1996 compared to 43 of those who started in 2004. This contrasts with an increase from just 8 to 11 students of 100 among entrants who never attended a for-profit, the report said.

The author argues that “diffuse concern with rising levels of average debt is misplaced” and that policymakers should rather “support for robust efforts to regulate the for-profit sector, to improve degree attainment and promote income-contingent loan repayment options for all students, and to more fully address the particular challenges faced by college students of colour.”