24th March 2022
Figure 4 is a further illustration of the phenomenon of non-repayment similar to Figure 2. In this case, years refer to the loan's origination year (its vintage), and the horizontal axis tracks the years since that initial origination year. As we can see, the share of loans with a higher current balance than initial balance rises vintage-by-vintage. All the vintages show an initial increase within the first few years, likely reflecting high prevalence of deferment for younger loans. They then level payday loan places in Warminster PA off, until the year 2016, which is a kink point for all vintages (thus reflecting the same pattern as in Figure 2). After that year, every vintage includes more loans with a higher current balance than initial balance, despite the fact that each vintage is getting older. And, most importantly, this metric shifts up with each vintage, suggesting that non-repayment is getting worse both over time and across vintages.
The kink point in 2016 likely reflects the expansion of IDR programs toward the end of the Obama administration, with the creation of the REPAYE program and aggressive s as a solution to delinquency, as detailed in the aforementioned CBO report.
Figure 4 is essentially the mirror image of Figure 15 from the 2015 paper A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising loan defaults by Adam Looney and Constantine Yannelis. That figure is reprinted below. It tracks loan repayment for successive repayment cohorts (defined, as with the CBO, by the year a borrower started repayment). That also shows repayment dwindling over time and across cohorts. Their data concludes in 2013. Since then, the economy has improved significantly (up until 2020), yet repayment has only gotten worse.
The subject of the paper by Looney and Yannelis is delinquency and default, primarily by what those authors call nontraditional borrowers, meaning they attended postsecondary education later in life and/or attended for-profit institutions. The authors rightly attribute the influx of non-traditional borrowers into the student loan system as a consequence of the Great Recession and the generally-poor labor market options available to workers in its aftermath, especially those with no postsecondary qualification. The purpose of their paper is to propose IDR as a solution to that rise in delinquency, which it is. In their conclusion, the authors write:
Because of the life cycle' of borrowing, delinquencies and defaults are a lagging indicator, and the current [as of 2015] high rate of delinquency obscures some more favorable recent trends. In particular, the number of new borrowers at for-profit and two-year institutions has dropped substantially, due to the end of the recession and to increased oversight of the for-profit sector, which is likely to improve the risk characteristics of future repayment cohorts. Moreover, borrowing by first-year borrowers and other enrolled students has ounts borrowed. These factors, coupled with efforts by the Department of Education to expand and encourage the use of income-based repayment programs are likely to put downward pressure loan delinquency in the future, although with a lag.
This turned out to be an accurate prediction: delinquency has been in decline since that paper was released. But as we have shown, the result is rising balances and the crisis of non-repayment. The idea that deferring currently-due payments would make repayment easier when the labor market improved turned out not to be the case.
We performed one final exercise to identify the effect of non-repayment, which is depicted in Figure 5. For each loan, we calculate the required annual payment amount (which is either the standard repayment schedule for a given initial balance and interest rate or an adjusted amount under IDR) as a share of the total outstanding balance, to see how the cost of carrying student loans has changed over time. Figure 5 plots two histograms for that number, one for all the loans in the cross-section data for 2009, the other for 2019. For reference, a standard 10-year uniform repayment plan would have that number in the neighborhood of 12-13% initially (i.e. when the total balance is highest, before progress toward repayment), depending on the interest rate. Over the life of a loan that is actually being repaid, the number increases since the required annual payment stays the same and the balance decreases. For that reason, as the distribution of outstanding loans gets older (recall Figure 3), we should expect to see the distribution of this annual-payment-to-outstanding-balance ratio shift to the right.