Examining Students in Distress: Labor Market Shocks, Student Loan Default, and Federal Insurance Programs

By Jael  Greene

In late March, the National Bureau of Economic Research (NBER) released a paper titled Students in Distress: Labor Market Shocks, Student Loan Default, and Federal Insurance Programs, which examined how the Great Recession (specifically the collapse in housing prices and massive employment losses) led to a dramatic rise in student loan defaults and the development of the Income Based Repayment (IBR) plan. This is important not only because of the impact that student loan defaults have on the federal budget, but also because of the effects that defaulting can have on student borrowers since student loans, unlike other types of loans, are not dischargeable in bankruptcy.

The report used student loan data from the National Student Loan Data System (NSLDS), noting that the student borrowers in the sample entered repayment on their loans between 1970 and 2009. The paper also utilized student borrower home price data from Zillow for the years 2006 to 2011.

Key findings include:

• The fall of home prices during the Great Recession was linked to 24 to 32 percent of the increase in new student loan defaults.
  • Home prices fell 14.4 percent between 2006 and 2009.
  • New student loan defaults rose from 3.59 to 4.27 percent between 2007 and 2010; an increase of 18.9 percent.
  • A 1 percent decline in home prices was associated with a 0.0113 percentage point increase in student loan defaults. This estimated relationship seems to account for 23.9 percent of the rise in new student loan defaults during the Great Recession.
• Likely in part due to a loss of employment and large drops in earnings, low income borrowers were 31.8 percent more likely to default on their student loans than other borrowers.
• Analyzing impacts from the standard ten-year IBR plan, where 15 percent of the borrower’s discretionary income was less than the payment amount, implies that the program led to a significant reduction in student loan defaults during the Great Recession.
  • The results imply that IBR eligible borrowers were more likely to default on their student loans before the introduction of the program as the effect was lessened after the introduction of the IBR program in 2009.
  • For borrowers who remained eligible but did not enroll in IBR, default patterns continued after 2009.
  • It would appear from the report’s analysis that IBR was at least partially successful at insuring borrowers against income shocks.