When most people decide to take out a student loan, they probably anticipate that a degree and a well-paying job will inevitably follow. But a new report from the Federal Reserve shows otherwise.
Not only do student loans not necessarily correlate with earning your diploma, but not graduating correlates with a higher incidence of default on those loans.
Approximately 16% of borrowers who started school but didn’t finish report falling behind on payments toward their loans. In contract, just 6% of borrowers who completed their associate’s degree reported falling behind. That number drops to 4% for those who completed their bachelor’s degree.
Another interesting takeaway from the report: students who were the first in their families to attend college and those who attended for-profit schools had a harder time keeping up with their loan payments.
16% of borrowers from for-profit schools reported falling behind on their payments, compared to just 6% of those who attended public universities. The study pointed out that students attending for-profit schools are more likely to be first-generation college-goers or minorities.
So why do students drop out before finishing college, even if it means walking away with debt? The most common reason given was family obligations, which accounted for 38% of the responses. Among women, the percentage who dropped out due to family obligations jumped to 43%.
Other common reasons students gave for not finishing their degree were moving directly into the workforce (27%), college overall got too expensive (24%) and they simply lost interest in completing their education (25%).
Financial advisors say students who drop out of college are four times more likely to default on their loans than those who complete their degree.
Keeping up with loan repayment can be particularly tricky with private student loans. These types of loans usually offer few options for repayment. If they do offer reduced or delayed payments, interest typically continues to build in the meantime, compounding the problem.
Borrowers of federal student loans have many more options, like income-based repayment plans or breaks for those who have fallen on economic hard times.