Who is more likely to default on a loan: a student who borrows a few thousand dollars, or one who borrows $50,000? The answer may surprise you: According to new data from the Department of Education, students who borrow between $1,000 and $5,000 default in 34% of cases, and the default rate falls as borrowing rises, down to 18% among students who owe more than $100,000. Why? Often, students who borrow more attend graduate school and end up earning more money, making it easier for them to repay their loans, writes economics and education expert Susan Dynarski at the New York Times. Just 7% of graduate school students default, compared to 22% of those who borrow only for their undergraduate studies.
More specifically, one key group is driving up default rates: Dropouts. "Students who attended a two- or four-year college without earning a degree are struggling to find well-paying work to pay off the debt they accumulated," writes Dynarski. She suggests that repayment periods increase from 10 years to 25 years to accommodate smaller monthly payments and that more students enroll in borrowing options tied to their income—the norm in England and Australia. Only 19% of Direct Loan borrowers use such programs, though student-aid groups hope to see that figure rise. (More student debt stories.)
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