The situation just got worse for student loan borrowers with six-figure debts.
The number of borrowers with balances over $100,000 has more than quadrupled in the last 10 years, according to data released Monday by the Federal Reserve Bank of New York. The default rate of borrowers with high balances “appears to have deteriorated over time,” Donghoon Lee, a research officer at the NYFed, said during a press briefing with reporters.
In 2016, borrowers with $100,000 in student loans or more make up just 5% of borrowers, but account for about 30% of total outstanding student debt, the data show. What’s more, these borrowers appear to be struggling more than they have in recent years.
But the default rates have spiked over the decade. Just 6% of borrowers with $100,000 or more in loans who left school between 2005 and 2006 defaulted on their debts five years later, according to the NY Fed. More than 20% of borrowers who left school between 2010 and 2011 owing that amount defaulted within five years.
William Dudley, the bank’s president, noted in prepared remarks that the change in the way we finance higher education over the past two decades — from state and local governments funding a larger share to families carrying a larger percentage of the load — is likely contributing to the trend of borrowers leaving college with higher levels of debt.
What’s more, rising college costs and student debt burdens may be diminishing the power of higher education as an engine of economic mobility, Dudley said. Borrowers who come from areas with lower incomes tend to struggle more with student debt, research from the New York Fed and others note.
Over the past several years, experts and higher education leaders have become most concerned about the fate of student loan borrowers with relatively low balances of about $10,000 or less. That’s because these borrowers are typically at the highest risk of defaulting on their debt, likely because their low balance is a signal that they didn’t complete much education.
Borrowers with six-figure debts, on the other hand, are less at risk of default because their high balances are often a sign that they’ve completed more schooling that’s made them valuable in the labor market.
Now it appears these borrowers are facing more challenges. While borrowers with high balances are still less likely to default than their counterparts with less debt, their default rates are catching up with the share of borrowers defaulting overall. The increased struggles of borrowers with six figure debts may reflect that it’s becoming more common to borrow $100,000 or more without getting a professional degree, like a medical degree, that typically assures good outcomes in the labor market, Lee said.
Even those borrowers with high balances who don’t default are still having trouble paying down their debt. Borrowers with $100,000 in student debt or more who left school in 2006 had paid down less than 30% of their debt by 2016, the New York Fed data show, compared with more than 70% for borrowers with $5,000 or less. This may be in part because borrowers with high balances are taking advantage of government repayment programs that allow borrowers to pay down their debts as a percentage of their incomes, but that stretch out the repayment terms of the debt.
The high debt levels may also be making it more difficult for these borrowers to take the next step in their financial lives. While borrowers who attend college are more likely to own homes than those who don’t, borrowers who attended college and who have debt loads of more than $25,000 are less likely to own homes by age 33 than those who attended college and have no debt or less than $25,000 in debt.
Policies that make college more affordable “would clearly be beneficial for income mobility over time,” Dudley told reporters. Asked later whether he felt offering college for free in the same way we offer public K-12 education could help to grow the economy, Dudley said those kinds of choices are largely political, but added “as the economy gets more complicated and college becomes more important, that’s a reasonable conversation to have.”