Student loan scams actually costs more than $1.3 TRILLION to Americans. Seven million borrowers are in default, and millions more are behind on their payments. People often connect these two data points: higher debt must lead to increased risk of defaults.
But, the truth is that default is highest among those with the smallest student debts. Of those who had borrowed under $5,000 for college, 34 percent ended up in default. For those borrowing more than $100,000, the default rate is 18 percent.
The big borrowers tend to be those who attended graduate school, or who earned undergraduate degrees at expensive, elite institutions. These borrowers spent many years in college, and so racked up many years of debt. But they built up a lot of human capital during their college careers, which pays off in the labor market.
By the other hand, the small borrowers spent just a year or two at a for-profit or community college. They racked up little debt. But they also built up little human capital, and so do relatively poorly in the labor market.
Borrowers from four-year colleges, by contrast, tend to earn good salaries out of college and to pay back their loans. For those leaving more-selective colleges in 2010, typical earnings were $49,000. For those leaving less-selective colleges, the figure is $35,000.
A policy that eliminated debt would also do away with default. But an end to student borrowing is not on the horizon. Even if tuition were free at public colleges, many students would still borrow to fund their living expenses. But, there are ways to reinforce the individual economic decisions borrowers make.
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