Association for Public Policy Analysis & Management

Prior to June 30, 2010, many federal student loans were made through the Federal Family Education Loan (FFEL) Program, under which private lenders like Sallie Mae made loans to students and received subsidies from the federal government to do so. But after 2010, the FFEL Program was abolished, and all federal student loans are now made directly by the federal government through its’ Direct Loan Program. The Obama administration’s end of the FFEL Program was meant to simplify the system for borrowers and to save taxpayer money by eliminating banks as middlemen. In the post-FFEL era, some analysts postulated that switching to Direct lending led or would lead to drastic increases in student loan default; though, Delisle (2017) disputed this claim, showing that the default rates overall between the two loan programs were largely the same prior to 2010. Yet, with a new administration in 2016, proposals have developed calling for a reversion back to a system where private banks play a role again in student lending (Krieghbaum, 2017). Unfortunately, little empirical work has been done to examine long-term student loan repayment outcomes for borrowers in relation to the types of loan portfolios they hold. Given the current policy landscape, it is important to understand if borrowers utilizing these two separate loan programs differ in any significant way in terms of their default and repayment outcomes.

We thus conduct an analysis of student loan default, which occurs when borrowers fail to make a payment on a student loan for 270 days (or 180 days prior to 1999). This outcome is important given its negative consequences for borrowers (e.g., lower credit scores, garnishment of wages, etc.), and for postsecondary education institutions who are held accountable for their former students’ repayment outcomes using cohort default rates. We examine default using survival models and a forthcoming dataset from the National Center for Education Statistics (NCES), the 2015 Federal Student Aid Supplement for the 1996 and 2004 Beginning Postsecondary Students Longitudinal Study Cohorts. These data draw on two cohorts of students who began college in 1996 and 2004, and who were subsequently matched to the National Student Loan Data System (NSLDS) in 2016. This allows us to track loan borrowing and repayment for up to twenty years for the 1996 cohort, and twelve years for the 2004 cohort. We group borrowers by the makeup of their loan portfolios upon entering repayment for the first time. The first group consist of borrowers who only borrowed loans through the Direct Loan Program. We create two additional groups, to indicate (1) a low level of FFEL Program usage, and (2) high FFEL Program usage, determined by the ratio of Direct Loans to FFEL loans. Our null hypothesis is that the program and the mix of loans within the portfolio have no effect on the probability of student loan default. The policy implications of this research has the potential to inform decisions on student loan reform in the coming years, particularly as the Higher Education Act undergoes reauthorization.