Rather we see our evidence as suggesting that the way we as society finance those degrees – with an increasing reliance on debt held by the students – has costs to both borrowers and lenders that are only now becoming clear. Given the social benefits of an educated population, we see a strong case for some public role in financing college. Nonetheless, there are many private benefits, including higher lifetime earnings to be had by the successful college graduate. Therefore it is likely that the best system of finance also includes a tuition payment by the student. Because many prospective students are credit and liquidity constrained, and because of the limited enforceability of debt, we outlined the case for a government-supported student loan program to support the payment of tuition. However, we see a case for stronger underwriting standards that would assess the likely quality and outcome of the education match between a prospective student and the educational institution, which would better deliver resources to high potential educational matches, and avoid encouraging poor ones. We’ve learned a lot over the past several years about how student loans are affecting individual borrowers, the taxpayers and the aggregate economy. We’ve by no means answered all the relevant questions, and with over a trillion dollars in outstanding debt and the future of our workforce at stake, I consider these issues to be of first-order importance to the nation.
One reason for this is that our data allow a more comprehensive description of student debt delinquency and repayment rates than was previously possible. Our data come from consumer credit reports 4  BIS central bankers’ speeches  for a 5 percent random sample of the population – that is for 12 million individuals aged 18 and older. Instead, existing knowledge of student federal loan defaults is based mainly on the three-year cohort default rates computed and released by the Department of Education each year. An institution’s cohort default rate is calculated as the percentage of borrowers in a cohort who default before the end of the second fiscal years following the fiscal year in which the borrowers entered repayment. In research that will be released later this month in a series of blog postings on our Liberty Street Economics blog, we use our data and a slightly different definition to compute comparable 3-year cohort default rates. Importantly, we find that three years out, we haven’t seen the full picture of borrowers who will default. Our calculations indicate that the 3-year default rate for the 2009 cohort rises by more than a third by year 5. This is also true of earlier cohorts. The 2005 cohort had a 3-year default rate at 13 percent – but this is only half of the defaults that we see nine years out. Taken together, these findings indicate that the student loan delinquency problem is much worse than currently understood.