State Variation of Student Loan Debt and Performance

Abstract

National student loan debt has continued to climb trending up despite the decline of other types of consumer debt since the Great Recession. This paper provides an overview of the student loan market and the distribution of individual loan balances and loan performance. The empirical analysis uses a state and time fixed-effect model to examine factors that influence the variation across states in the amount borrowed and delinquencies measured in terms of balance or number of borrowers. The results show that states with higher student loan balances are not necessarily those with poorer loan performance. There are no clear patterns of amount borrowed, but loan performance differs among races and ethnicities. States with a higher percentage of their population with a college degree borrow less and have better loan performance. States with higher average credit scores tend to have lower rates of delinquency. Credit scores are not necessarily related to the amount borrowed because the majority of student loans are federal are not underwritten based on borrowers’ credit risks. Controlling for time fixed effects wipes out the influence of state median income, unemployment, tuition and fees, and state support for higher education on average loan balance or loan performance. State financial aid only affects amount borrowed, but not impact loan performance. Patterns of college enrollment by state have a very small impact on student loan balance or loan performance. Because information at the level of the individual borrower is limited, this analysis, which instead uses state-level data, can help shed light on consumer decisions to take out and repay student loans, and may also help determine how to allocate resources at both the state level and national level.

Keywords: Student Loan, State Variation, Balance Delinquency

JEL Classification: D12, I22, H73