How Will Student Loan Borrowers Fare After the Pandemic?

Increased repayment challenges could outlast the COVID-19 recession

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How Will Student Loan Borrowers Fare After the Pandemic?
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Policymakers acted swiftly last year to help student loan borrowers after the onset of the COVID-19 pandemic and subsequent economic downturn by pausing most required payments through at least September 2021. Much of the recent student loan policy discussion has focused on short-term issues, such as borrowers’ abilities to make payments during a public health emergency, but what happened after the Great Recession suggests that repayment challenges could linger or accelerate after the pandemic ends.

As the Great Recession receded nearly a decade ago, the share of student loans in serious delinquency—that is, loan payments overdue by at least 90 days—had grown from 7.3% in 2009 to 10.5% in early 2013. This climb stood in stark contrast to other forms of consumer debt, which tended to show sharp reductions in serious delinquency rates once the economy began to recover. (See Figure 1.) The percentage of mortgage debt in serious delinquency, for example, fell to less than half its peak level within the same period.

Student Loans in Serious Delinquency Grew After the Great Recession, Unlike Most Consumer Debt

But signs suggest that the impact of the COVID-19 economy on higher education financing will be different from past downturns in important ways. For example, this time undergraduate enrollment in higher education has declined, especially at community colleges. Still, a close look at the last recession highlights factors that could help determine the extent to which current and future borrowers encounter loan repayment challenges.

This analysis examines two factors that contributed to repayment issues following the Great Recession and the extent to which they might apply to the current economy. They are:

  • The surge in enrollment, borrowing, and subsequent repayment challenges among adult students in their 20s and 30s who attended for-profit and two-year schools, often with low completion rates, following the onset of the previous recession.
  • The lingering economic weakness that then dampened employment prospects for these students after they left school.

Enrollment and borrowing trends affected repayment outcomes

A key factor in why student loan repayment challenges grew after the last recession was the rise in postsecondary enrollment during the recession and a corresponding shift in which students were taking out student loans. As in previous downturns, the Great Recession saw a significant spike in higher education enrollment, growing from 19.1 million in 2008 to 21 million in 2010, as people sought to build job skills while employment prospects were weak.

Much of this growth came from adult students in their 20s and 30s who disproportionately enrolled at for-profit and two-year institutions. These institutions also saw the biggest growth in loans during the recession, according to research by economists Adam Looney and Constantine Yannelis. Many adult students are drawn to for-profit and two-year institutions, in part because these schools typically offer more flexible course scheduling that enables students to enroll while continuing to work. For-profit schools also have had a large presence in online learning. By the fall of 2012, more than half of students attending for-profit schools were already taking courses exclusively online.

But these new borrowers frequently stayed in school for relatively short periods because they attended short-term programs or because they left school without completing a degree. Both factors contributed to a surge in borrowers entering repayment just as the recession was ending.

Many then struggled more than other borrowers to repay their loans. Among those who entered repayment in 2011, around 30% who had attended for-profit, two-year, and nonselective four-year institutions defaulted within three years. Nonselective schools typically admit more than 85% of applicants. In comparison, 13% of undergraduate borrowers at four-year schools with at least some selectivity defaulted in that time frame, according to the analysis by Looney and Yannelis.

These repayment difficulties were linked, in large part, to the kinds of schools attended. The analysts caution that they cannot fully explain the link between default and the type of school, but they note that these for-profit, two-year, and nonselective four-year schools generally had lower rates of completion. And research shows that degree noncompletion is strongly linked to student loan default. More recent research suggests that schools themselves play an important role in determining student outcomes, including educational attainment and future earnings.

Looney and Yannelis note that these schools tended to enroll students with certain characteristics—more were financially independent, came from low-income families, or both. That compounded their vulnerability to default, perhaps partly because they were less likely to get family support. The analysis still found a connection between school type and default, even after accounting for these characteristics.

But data limitations prevented the economists from looking at certain important demographic measures such as race. Other studies have shown that Black borrowers face outsized student loan challenges, with larger loan balances and higher rates of default than peers in other racial and ethnic groups. However, there is little information comparing student loan borrower experiences by race and ethnicity around the time of the Great Recession.

Why Student Loan Repayment Outcomes Differ From Other Loan Types

The increasing number of borrowers vulnerable to repayment challenges during the most recent recession reflects the widespread availability of student loans. Unlike other categories of debt, the federal government does not impose underwriting standards—restrictions on lending based on an assessment of ability to pay—on most student loans. This is by design. These loans are intended to promote access to higher education by assuring that students will have the funds needed to attend college regardless of their financial background. Underwriting standards could restrict access.

The federal government does restrict where students can use loans by requiring institutions to be accredited. The schools also must have short-term default rates below certain levels, among other factors, to be eligible for federal aid.

Still, over the past two decades, schools have rarely faced sanctions for high default rates. There are also annual caps on how much undergraduate students can borrow in federal student loans. Parents and graduate students, however, can borrow up to the full cost.

In contrast, other categories of consumer debt, such as mortgages, have underwriting standards, including many that were tightened during the Great Recession. Thus, even as a growing share of student loans flowed to borrowers who were more likely to encounter repayment challenges, lenders in other areas increasingly restricted loans to borrowers who were deemed at risk of not being able to repay.

This difference in accessibility helps explain the pattern in Figure 1, which shows student loans in serious delinquency rising in the wake of the last recession as similar signs of repayment struggles fell—in some instances sharply—across other areas of consumer lending.

Slow recovery prolonged repayment challenges

The slow economic recovery after the Great Recession contributed to repayment challenges. The downturn started in late 2007 and the recovery began in June 2009, but it was not until late 2015 that unemployment fell to 5%, where it had been just before the recession.

Many students who enrolled in for-profit and two-year institutions entered the labor market before the economy had much time to recover. According to Looney and Yannelis, these borrowers experienced higher unemployment and lower earnings outcomes during the sluggish recovery than peers who attended selective four-year schools. Their analysis found that, in addition to factors already outlined, challenges in the job market were a strong predictor of loan default in the years following the last recession.

Although the students who attended these types of institutions faced more difficulties even when the economy was stronger, the weak economy exacerbated their economic struggles and left them even further behind their peers.

More generally, research shows that 30% of unemployed borrowers end up defaulting on their student loans, nearly twice the rate of those who are employed. And even for borrowers who do land secure jobs, simply graduating during a recession can have a long-term negative impact on lifetime earnings, limiting income for at least 10 to 15 years. Departing school in a weak economy can make loan repayment more difficult for years after a recession has ended.

Differences between recessions

As the country begins to emerge from the pandemic, early signs suggest some key differences from the last recession in enrollment and the pace of economic recovery that could make a post-recession spike in delinquency and default less likely.

Instead of seeing a boom, higher education enrollment is experiencing a decline at the undergraduate level. In the 2020 fall semester, enrollment at that level was down 3.6% from the previous fall with a particularly large 10% drop across community colleges. The latest data on 2021 spring enrollment suggests a similar pattern of decline from the previous spring.

Although this enrollment trend might mean fewer borrowers are at risk of repayment challenges in the future, it also raises concerns that many may be missing out on educational opportunities because of economic or pandemic-related challenges.

In terms of the pace of economic growth, many leading forecasts predict a strong recovery as the virus recedes, outpacing the upswing that followed the Great Recession.

Moreover, the federal government has passed economic stimulus packages that include significantly more aid than provided during the previous downturn, intended to promote economic growth and make sure that it is broad. Congress included provisions to help postsecondary students, institutions, and student borrowers as well as low-income families, the unemployed, and the broader economy.

Beyond enrollment and a faster recovery, there are other key differences with the Great Recession that could mitigate the level of repayment challenges going forward. One is a large increase in the use of income-driven repayment (IDR) plans, which tie borrowers’ monthly bills to their income. This change has been largely driven by expanded eligibility for these types of plans. Research shows that borrowers on IDR plans are less likely to default. The Congressional Budget Office (CBO) recently estimated that use of IDR plans grew from 11% of undergraduate borrowers in 2010 to 24% in 2017. 

Most borrowers also have had their federal student loan payments paused for almost the entirety of the pandemic—relief not extended during the last recession. However, it is still too early to know the longer-term impact that this temporary relief will have on borrowers once the pause is lifted, especially for those who have continued to struggle throughout the pandemic.

Policymakers also are exploring further changes that could vastly reshape the student loan landscape, such as broad student debt forgiveness policy proposals that, if enacted, could further distinguish repayment outcomes from the last recession.

Many may face continued difficulties

Despite these differences, other factors suggest that the impact of the pandemic on student loan repayment could linger for many borrowers.

For example, one current enrollment trend does echo the Great Recession: an increase in students attending for-profit colleges. This institution type saw the largest rise in enrollment this fall, growing by more than 5% overall. Just as in the last recession, adult students are driving this growth. First-time enrollees over the age of 24 at for-profit schools were up more than 13%, despite a 30% decline in this age demographic attending any institution type. However, enrollment at for-profit institutions decreased slightly this spring from the previous spring, so it is unclear whether the fall growth suggests a persistent pattern.

This rise could foreshadow future loan repayment challenges, as those who attend for-profit schools have historically borrowed at higher rates and had higher levels of default than those who attend other types of institutions. Although graduation rate data for the most recent cohort will not be available for several years, the latest available data shows little to no improvement in for-profit completion since 2008.

And although forecasters anticipate a strong economic recovery overall, they also highlight the disparate economic impact of the current recession, noting that the recovery is likely to leave many workers behind. In its latest projection, CBO cautioned that “the unemployment rates for younger workers, workers without a bachelor’s degree, Black workers, and Hispanic workers are expected to improve more slowly than the overall unemployment rate.” 

The economy is coming out of a deep hole and may need time to get back to pre-pandemic unemployment levels. For context, the jobless rate reached nearly 15% in April 2020 as the pandemic shut down much of the nation, surpassing the peak during the Great Recession by almost 5 percentage points.  About 6 million people left the labor force entirely between the first and second quarters of 2020. 

The unemployment rate has come down significantly and quickly to about 6% but remains well above the 3.5% pre-pandemic level. Labor force participation also still lagged pre-pandemic levels by 1.5 percentage points as of April 2021, according to data published by the U.S. Bureau of Labor Statistics. The latest summary of economic projections from the Federal Reserve suggests that the rate will gradually fall to pre-pandemic levels by the end of 2023. 

Finally, beyond these similarities, an end of the payment pause on student loans could create havoc for borrowers and challenges for student loan servicers in helping them navigate re-entry into repayment. All of these factors foreshadow possible repayment difficulties for many borrowers in the months and years to come.

Phillip Oliff is a director and Ilan Levine is an associate with The Pew Charitable Trusts’ student loan research initiative.

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