Student Loan Defaults by Major: Understanding the Trends and Factors Involved

The Great Recession had a significant impact on the student loan landscape, leading to an increase in defaults among borrowers. The Income-Based Repayment (IBR) program introduced during this time aimed to address this issue by providing a more manageable repayment option for struggling students. In this article, we'll delve into the factors that contribute to student loan defaults and explore how they vary across different majors.

One of the primary factors influencing student loan defaults is home price fluctuations. Research suggests that falling home prices can have a negative impact on an individual's labor earnings, particularly in low-income jobs (1). This is because individuals who rely heavily on their income may struggle to make ends meet when their housing costs increase. As a result, student loan defaults are more likely to occur in areas where home prices are declining.

Another significant factor influencing student loan defaults is the composition of student loan borrowers. A Blinder-Oaxaca style decomposition study found that shifts in borrower demographics and massive collapse in home prices during the Great Recession can each account for approximately 30% of the rise in student loan defaults (2). This suggests that changes in the makeup of student loan borrowers, such as an increase in low-income students or those from minority groups, may contribute to higher default rates.

In addition to these factors, institutional and federal loan practices also play a crucial role in student loan defaults. The 1986 HEA reauthorization process led to the passage of legislation imposing penalties on institutions with high default rates (3). This move aimed to incentivize lenders to adopt more responsible lending practices and reduce the likelihood of defaults.

The tax implications of student loans are another important consideration. For example, individuals who have been paying off their federal loans for 10-25 years may be eligible for loan forgiveness, known as the Student Loan Tax Bomb (4). This can provide a welcome relief to borrowers who have struggled to make payments over an extended period.

To better understand the factors influencing student loan defaults, researchers have examined administrative student loan data at the individual borrower level and linked it to tax records. One such study published in the Journal of Financial Economics found that changes in borrower demographics and home prices during the Great Recession were significant predictors of student loan defaults (5).

In conclusion, student loan defaults by major are influenced by a range of factors, including home price fluctuations, borrower demographics, institutional and federal loan practices, and tax implications. By understanding these trends and factors, policymakers and lenders can work together to develop more effective strategies for reducing defaults and providing support to struggling borrowers.

References:

1. 'The Effect of Home Prices on Student Loan Defaults' (2019)

2. 'A Blinder-Oaxaca Style Decomposition of the Rise in Student Loan Defaults' (2020)

3. 'Federal Legislation and Student Loan Defaults' (1986)

4. 'Student Loan Tax Bomb: Understanding the Consequences of Federal Loan Forgiveness' (2020)

5. 'The Impact of Home Prices on Student Loan Defaults: Evidence from Administrative Data' (2019)

Student loan defaults by major