A different take on student loan defaults

Stereotype: student loan debt is at all time high levels and is now larger than credit card debt.  Defaults are rising mainly because of the rising cost of four-year colleges and graduate schools.  

Not so fast, says the NY Fed in a post yesterday on Marginal Revolution.  It turns out that default rates are highly correlated with balance due at the end of schooling.  The default rate is over 30% among those with a balance of $5k, whereas it is between 15 and 20% for those with a balance due of $100k or more.  Those with very high balances tend to be those who completed school, whereas those with the lowest balances tend to be predominantly those who lasted only a semester or two.  

Turns out that there are a lot more student borrowers in the low balance category (72% owe $25k or less) than the high balance one (3% owe $100k or more).  One of the commentators on the NY Fed blog offers a possible explanation of what is going on:

Bad credit seems to correlate with bad academics. Many seem concerned more with paying bills than paying education. Sometimes they are just out of jail and no one will hire them. Their probation requires they work or get a job which the later is nearly impossible. Other times we have people so deep in the hole in debt already that the student loans was a way to buy more time. The word is out if you have bad credit and are desperate for funds just go to a community college where tuition is low and borrow the maximum. We noticed in our data pull many students graduated from high school or received their GED up to 10 years ago or more! 

I should emphasize that correlation is not causation, but these results raise serious questions about how the US is structuring its student loan programs at the federal level.