Thinking about why small student loans aren’t repaid

Student loan crisis

An article, linked above, notes that small loans tend not to be repaid, with a loan under $3k being substantially less likely to be repaid over time than a loan of $24k. This tends to be more true of for-profit schools and black students. Why? Dispense with race and move into class: these students tend to come from $0 net worth households, households where bank accounts are relatively rare, households where budgeting this need over that and then some other need over that has occurred. Think about the last: if you must forego paying your electric bill to pay for the gas, or if you forego dental work because you need the money to pay other bills, then you’ve learned how to make the compromises necessary for your socio-economic class. A student loan fits into that world. You can compromise about repayment because you either need to make compromises like that or, at a minimum, you’ve learned how to do that because you’ve needed to learn that skill. It is a skill. Note – and this is important: the issue isn’t really the student loan default rate but whether the people defaulting received enough education to advance their lives, whether the schooling turned out to be a decent investment. Loans are just accounting entries. Some number of them are expected to perform and some not. Once loans are made, they have a value based on that kind of risk evaluation factor. If they go into default, the value drops. It keeps dropping. I’ve received many phone calls from creditors looking for a former tenant: each new creditor has bought some pool of defaulted loans in the hope of shaking loose some coin. There is no more value in the loan than scrap financial value. There is no great systemic risk in writing off student loan debt because it gets written down over time: as the loans age, they lose time value as well and they need to be re-evaluated periodically to adjust for how the risk of repayment has changed. Think of loans as living souls, and the evaluator as an actuary looking at mortality tables. One of the great changes in the white educated population over the last few decades is that one group has become divorced in class from the skills of deciding what to give up so you can get by. That’s another story though.