Why students with more debt default less

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A recent blog post by University of Michigan economics professor Susan Dynarski highlights a quirky fact about the massive amount of student loans in the United States: Those who take on the most debt are usually the ones who can most afford to repay it.

At $1.2 trillion, total student debt in America is at an all-time high, and has become a talking point for the upcoming presidential election. But the figure is misleading for a few reasons–first, because it’s just a big number with no context, and second because it tells you nothing about who is doing the borrowing and what happens to them.

Dynarski’s post, on a blog run by the Brookings Institution, a think-tank, shows that individuals with more debt actually tend have lower rates of default. That’s because people with the most expensive educations–like doctors–tend to earn enough after graduation to repay their debt. Here’s a key chart from Dynarski’s post:


Dynarksi explains that over the past 50 years, workers who have graduate degrees have seen their real income nearly double, which is a far bigger gain than any other group of workers. For instance, median debt is $141,000 for lawyers and $162,000 for doctors, Dynarski notes, but wages in those professions are many times higher than the national average. As a result of these dynamics, an estimated 7% of graduate borrowers default, compared with 22% for those who only get undergraduate degrees.

Dynarski argues that the real focus for policymakers looking to address defaults should be on another group entirely: the millions of students who drop out before they graduate. They have smaller debts but the debts are much less affordable for them, so that’s where loan defaults are concentrated.

It’s also worth keeping in mind that the $1.2 trillion figure that’s tossed around as a scary and intimidating student-loan crisis statistic is meaningless without context. When examining total outstanding U.S. student loans in constant dollars, the aggregate number increased 120% between 1995 and 2014 according to the College Board. That sounds a lot less scary than the 239% it would be in nominal dollars, without adjusting for inflation. And while the number of overall borrowers has doubled, the average student's debt load, about $8,400, is up just 6.3% over that period of time.

It's true that there are now more students taking out debt than ever, and that this is likely causing them to delay the kinds of life milestones that help boost the economy, while also crimping their day-to-day spending habits. But data continue to show that financing your education is worth it in the long run. Dynarski argues that proposals like Bernie Sanders' to make public colleges free wouldn't address the issue of students who borrow to fund living expenses, and also leaves out the 20 percent of students attending private colleges.


Fixing repayment requires its own solution, distinct from efforts to reduce the price of attending a public college," she says.

If we want to make student debt less painful across the board, Dynarski proposes extending the repayment period to 25 years–the period many other countries have adopted–which allows for smaller monthly payments.


Rob covers business, economics and the environment for Fusion. He previously worked at Business Insider. He grew up in Chicago.