When it
comes to student loans, according to a new report released by the White House,
it’s not the size of the debt that matters, it’s the student’s ability to repay
it.
Students
with large loan balances ($40,000 and up) are less likely to default by the
third year. Only 4% of students with loan debts that high typically stop
paying. On the other hand, 35% of students with less than $5,000 in debt have
defaulted on their loans. In between this high and low, the percentage of
defaults drops as total loan debt rises.
The
difference is that most of bigger loans were accumulated because the students
persisted toward graduation over a number of years and finally graduated with a
degree. The report noted that students with more debt also averaged much higher
salaries, so they were able to repay what they had borrowed and still have
sufficient income for normal living expenses. Even students who only completed
a few semesters with no degree may have been able to parlay that education into
better jobs than those with little to no postsecondary coursework.
Conversely,
students with small loans had often dropped out of school early on for a
variety of reasons and gained no improvement in their earning power. They were often
at the low end of the salary scale, struggling to pay monthly bills, much less
their loans.
The report,
Investing in Higher Education: Benefits, Challenges, and the State of Student Debt, also makes a case for programs that enable students to make smaller
payments in the first few years after leaving school or to structure payments
as a percentage of income. This would reduce the number of defaults, regardless
of whether students graduated.
