Rising UNC Student Loan Default Rates Indicate Fundamental Problems

Student loan debt in North Carolina is not a good news-bad news story. It is a bad news-worse news story. Student debt, with a couple of exceptions, has been rising across the board at University of North Carolina schools, both in the percentage of students who need loans and the amount of their borrowing. Additionally, this is leading to a sharp increase in the rate that student borrowers default on those loans, as can be seen in the chart below:

Table 1. Increasing Student Loan Default Rates

But as bad as the general increase in default rates seems, those numbers pale compared to another trend that is even worse. That is, the default rates at the system’s Historically Black Colleges and Universities (HBCU)—Elizabeth City State (ECSU), Fayetteville State (FSU), North Carolina A&T (NCA&T), North Carolina Central (NCCU), and Winston-Salem State(WSSU) (+1 for minority-minority UNC-Pembroke—UNCP)—are not just rising: they are becoming astronomically high.

Table 2. UNC System Student Debt, State Funding, and Tuition

Reasons why this is occurring are not hard to find. What may be hard to find is the political courage to do something about it among the state’s leadership.

According to N.C. State Senator David Curtis, there are “two UNC systems,” with the differences between the two often blurred at the legislative level. One includes schools with high admissions standards that “regularly receive national awards for excellence.” But at the other end of the spectrum, Curtis said some schools:

“have low admissions standards, admit thousands of students who are not prepared to do college level work, and have little chance of graduating. This unfortunate situation leads to drop out rates approaching 70%, state tax cost well over $100,000 per degree, and high student loan default rates. It also wastes hundreds of millions of state tax dollars, federal tax dollars, and personal family dollars. We are doing a huge disserve to all stakeholders – students, parents, and tax payers by allowing this practice to continue.”

The problem is not the money spent on the UNC HBCUs + 1 nor a lack of “access.” Their state appropriations are not the lowest of the UNC schools, but in the middle of the pack. The three schools with the lowest per student state appropriations—UNC-Wilmington, Appalachian State, and UNC-Charlotte—had default percentages of 6.7, 4.8, and 6.2 respectively. Not good, perhaps, but nowhere near Elizabeth City’s 22.9 percent or NC A&T’s 18.0 percent.

Tuition for all of the HBCUs + 1 is lower than all other schools in the system. State aid and federal Pell grants are enough to cover tuition for qualifying low-income students, at the least. But those schools tend to have high rates of borrowing. Only three of the HBCUs + 1 have released the percentage of students who take student loans, but those are the highest in the system. However, while the amounts borrowed by students at those three schools are above the system average, they are not exorbitantly so. (One must wonder why the three other HBCU schools have not released their statistics).

The problem, then, does not appear to be on the financial side, then, but on the academic side.  Looking at the table below confirms that possibility: just as Senator Curtis suggested, the HBCUs + 1 are admitting large numbers of unprepared students who are unlikely to graduate—undoubtedly contributing to the high default rates.

Table 3. Default Rate, Graduation Rate, SAT Scores

And the correlation between admissions standards and graduation rates with loan default rates holds at the high end, too. The schools with the best SAT scores and graduation rates, UNC-Chapel Hill and North Carolina State, are also the schools with the lowest default rates.

Almost by definition, higher student loan default rates are driven by the gap between expectations of future success and the ability to find good employment after school. That many students have unrealistic expectations is increasingly well-documented. A new report from the ACT revealed that 84 percent of low-income students say they aspire to a four-year baccalaureate degree, but only one in ten meets all four of the ACT’s college-readiness benchmarks.

It is apparent that increasing college attendance does not necessarily contribute to greater general prosperity. Instead, it is in many cases placing a millstone around the necks of the very young people who can least afford it.

Several decades ago, young minorities were fed a myth that sports was the ticket out of poverty when only a tiny few were able to perform at the level needed to get scholarships and professional contracts. Today they are buying into another set of myths: that they must attend a four-year academic school to succeed and that a meaningful four-year academic degree is easily attained.

So what is the solution?  Some may clamor that we need to make college attendance—including room and board—entirely free. But that is really a non-solution, as many young people will still not be equipped for an academic education and drop out, wasting time that could have been spent more wisely. Or they may cluster in easy majors for which there is little prospect of well-paid employment.

Instead, for students, simple common sense is the most likely cure. A Brookings Institute study showed that the path to staying out of poverty is indeed simple: finish high school, get a full-time job and wait until age 21 to get married and have children. Of Americans who follow those rules, only two percent live below the poverty line, and nearly three-quarters achieve an income that places them in the middle class (defined as $55,000 per year in household income).

Others suggest taking that advice a bit further: stay working, get married and stay married, and stay out of debt except for a sensible home mortgage. That’s about it. People who follow these rules by and large do well in life financially.

For the state, it has to consider whether it can continue subsidizing six universities with low admissions standards when there are signs that doing so may be counterproductive. One way may be to combine several universities. Another solution may be to end their racial emphases: it may be best that these schools are charged with serving a geographic region rather than serving a race.

Furthermore, the state should expend more effort on giving better and more individualized guidance to young low-income students instead of automatically shoving them into the higher education machine out of which many emerge worse off than when they started.

Rapidly rising student loan default rates are a symptom of other problems: a low-growth economy that cannot absorb lots of new educated workers, unrealistic expectations by young people that borrowing to go to school will necessarily pay off, and a political structure that does not always face up to real problems.

It will take considerable change in culture and policy to produce some good news about student loan defaults. It will also take some strong political will to face up to the entrenched interests in the education establishment that produced the bad news-worse news situation in the first place.