Chances of Defaulting Decreases with Larger Loans

seboldadminEconomic Insights

It seems counterintuitive, but the less debt a student leaves school with, the greater risk they are of defaulting on their loan. The Consumer Credit Panel (CCP) teamed up with Equifax to create data for the Department of Education and this was their finding. Students who leave school with less than $5 thousand in student loans are 61% more likely to default at any time than a student with a debt load of over $100 thousand. Only three percent of all borrowers fall into the $100k club while 21% do not owe any more than $5k. Consider the types of students that receiving large sums compared to those only requiring a few thousand dollars.

The former are students studying for an advanced degree or specialization. These are more likely to be graduate students or med students with elite job opportunity upon completion. The latter may have dropped out after only a semester or two or they needed the money to attend a less costly community college. These students are less likely to begin a career path when they leave school. The lower skilled job opportunities lead to less monthly pay, making it more difficult to pay back even a small loan balance.


March 2, 2015