An Analysis of the Probability of Default on Federally Guaranteed Student Loans

A statistical analysis of loan default among graduates of 2- and 4-year colleges and universities has several important implications for those charged with making public policy concerning federal student loans. The occurrence of graduation stands out sharply as working to lower default. To the extent that graduation opens employment opportunities and raises earnings, successful retention programs will serve to lower an institution's default rates. However, it is also plausible that the tenacity of purpose and internal motivations that cause some students to complete a degree may also be operating to reduce their default rates. To this extent, graduation may be more of an observed "effect" that will respond less to university retention programs. The findings point strongly to the inappropriateness of penalizing individual colleges solely because of high observed default rates. The results indicate that individual characteristics, not institutional ones, are key determinants of default.