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.