New Data Show Wider Repayment Gap Between Low- and High-Income Borrowers

Last Friday, the US Department of Education identified an error in the way it had been calculating student loan repayment rates. In a previous post, we found that the percentage of borrowers repaying their loans at non-profit, public and for-profit colleges, and at two- and four-year institutions were consistently lower by an average of 20 points compared to the old, erroneous data set. Below we explore the degree to which other borrower characteristics that tend to impact repayment outcomes may have been jostled by the error. Most notably, the new data reveal a larger divide between the progress that high- and low-income borrowers have made on their student loan balance three years after leaving the same institution. 

Income

A number of factors affect how well students fare in repayment. But research has consistently demonstrated that students from low-income families struggle more in repayment than their higher-income peers. Often a result of financial strain, low-income students graduate at lower rates. Those students who don’t complete a degree may not experience a boost in earnings and among other reasons could have difficulty paying down their loans after entering the workforce.

While the updated three-year repayment rates uphold this finding, the spread between high-income borrower outcomes and their low-income peers has widened significantly. In the old, erroneous data, low-income students had repayment rates about thirteen percentage points lower than high-income students at the same institution. But the corrected data now reveal that high-income borrowers are nearly 26 percentage points more likely than low-income students to have made progress on their principal three years after entering repayment. In the new data, low-income borrowers are not just faring objectively worse than previously thought, the relative wealth divide as it pertains to loan repayment has doubled.

Pell Grant Eligibility

Given what we know about the impact of income on student loan repayment outcomes, it’s not surprising that those eligible for the need-based Pell Grant have also consistently fallen behind on their debt to a greater degree than those who do not qualify. Similarly to the income divide, the corrected rates uncover a wider spread between Pell recipients’ and non-Pell borrowers’ repayment outcomes.

Completion Status

Those who take on debt but don’t graduate or finish their program of study may find it difficult to repay their loans without promising job prospects. But in the newly released data, the dilemma of debt-with-no-degree becomes even more apparent. Previously, non-completers on average repaid their loans at a rate 16 percentage points below  those who finished. But in the corrected data, this gap rises to over 20 percentage points.

Median Debt

Relatedly, college graduates are more likely to have taken on higher debt relative to those who drop out of college since those who have made only minimal progress toward their degree accrue fewer educational expenses. In this sense, students with lower debts often struggle more in repayment than those who have taken on more loans within the same institution. While this seems counterintuitive, it is generally believed to be a function of completion rates.

For the most part, the change in repayment rates is consistent for each quartile of median debt at institutions. But for colleges where students have taken on the lowest levels of debt at the median, the change in repayment rates between the old and updated data sets is smaller. In other words, there was a slight  tightening in the divide between repayment outcomes at institutions where there is low average debt and those where students take on a lot more.

While the newly corrected data don’t reveal any novel findings or challenge familiar understandings of the difficulties many low-income students face in repayment, they do unfortunately offer an even more grim outlook for many of the most disadvantaged students in higher education.