This requires a combination of financial support but with sufficient likelihood of success/ability to repay/for positive return. The low returns to some students’ experience with higher education, evidenced by high dropout and default rates, point to significant heterogeneity in outcomes for college students. An individual making the joint decision of whether to enter college and which college to enter faces a high degree of uncertainty regarding the future outcome of the educational experience. Tuition subsidies funded by state taxes and Pell grants funded by federal taxes work to distribute this risk over a wide pool of people. However, individuals with good college outcomes enjoy the private benefits that accrue to their higher-earning power. As a result, it is likely that the best type of financing arrangement would require at least some tuition payments from students. To overcome the liquidity constraint faced by families whose members are entering college, it makes sense to have a loan program. Importantly, the financial system, whether private or public, should direct scarce resources to highly-valued investments. Given the wide heterogeneity of educational outcomes by type of student and type of institution, any loan program should take careful account of the expected quality of the match between the prospective student and the educational institution. This is a type of underwriting that could be employed much more extensively in the federal student loan program, to the benefit of both borrower and lender.
However, while the available data limits deeper analysis of this issue, it seems reasonable to suspect that high college dropout rates contributed to loan repayment problems. As is well known, approximately 40 percent of college students drop out of college before finishing their degree. Among low-income students two-thirds don’t complete their degree, with rates also varying across institutions and majors. While the average wage returns to college remain high, for the substantial share of student loan borrowers who drop out of college, the net returns are likely to be small or negative. Returns are also likely to be small for those who attended a set of for-profit institutions. Enrollment at those institutions surged during the recession. While our data don’t allow us to investigate the returns for these groups of students, their especially low loan repayment rates (as reported elsewhere) are consistent with low post-college employment and earnings, suggesting that eventual returns to these educational investments may be low. The increase in defaults and decline in repayment may also reflect a change in the composition of college entrants during the recession, where even those with relatively low, or even negative returns to college, enrolled in order to qualify for grants and loans as a source of income. The individual and macroeconomic implications of growing student debt go well beyond the high default rates and may not have been sufficiently anticipated and understood.