Why Lower House Prices Lead to Higher Student Loan Default Rates
Why Lower House Prices Lead to Higher Student Loan Default Rates
David McNew/Getty Images
Add this to the list of potential consequences of the housing bust: Rising student loan defaults.
Drops in housing prices during the Great Recession account for between 24% and 32% of the rise in student loan defaults during the same period, according to a working paper distributed this week by the National Bureau of Economic Research, a nonprofit economic research organization. The study — which is based on administrative student loan data, de-identified tax data and zip code home price data for roughly 300,000 student loan borrowers in repayment during the recession — shows that borrowers living in zip codes where home prices fell more dramatically were more likely to default.
The study doesn’t indicate that the risk of a student loan default is directly connected to the value of a borrower’s home. Instead, the findings show that the effect of declining home prices on a region’s labor market contributes to rising student loan defaults. Earlier research cited in the paper indicates that when the value of homes in an area fall, households spend less and therefore local businesses are often forced to keep workers’ pay stagnant or, ultimately, lay them off.
“The huge rise in student loan defaults is on everybody’s minds and the question is what’s the cause of this rise?” said Holger Mueller, a professor of finance at New York University’s Stern School of Business and one of the authors of the paper. “What we want to do is point to another very important source of default risk and that’s just the labor market.”
The study adds a new element to prior research, which has pointed largely to one explanation for the rise in student loan defaults: An uptick in riskier borrowers attending college. So-called nontraditional students, who tend to be older and attend community or for-profit colleges, have accounted for a growing share of student loan borrowers. Because this group is at higher risk of defaulting on their loans, the growth in their ranks has pushed up the overall default rate, previous research by Mueller’s co-author, Constantine Yannelis, has indicated.
More than 1 million federal student loan borrowers defaulted on their debt last year. Defaulting on student debt, particularly a federal loan, can be devastating for a borrower; it’s typically a credit-ruining event and the government has the power to garnish your Social Security check, tax refund and wages over a defaulted student loan.
Mueller and Yannelis’ research indicates that the policies the government offers to help borrowers avoid this outcome are somewhat effective. Federal student loan borrowers have the ability to pay back their loans according to their income. These plans also offer borrowers the opportunity to discharge their loans after at least 20 years of repayment. Mueller and Yannelis’ research indicates that these plans are at least partially successful at protecting borrowers from the income and employment shocks that can come from falling home prices — as long as borrowers sign up for them.
The Obama administration expanded these plans, but struggled to publicize them. What’s more, regulators and others have accused student loan servicers of making it more difficult than necessary for borrowers to enroll in the plans. But congressional Republicans have questioned the plans, as the potential cost of forgiveness appears larger than estimated.
The post Why Lower House Prices Lead to Higher Student Loan Default Rates appeared first on Real Estate News & Advice | realtor.com®.
Source: Real Estate News and Advice – realtor.com » Real Estate News