Borrowers’ Inability to Pay

Since higher education is a risky investment, some former students may end up working at jobs that pay no more than the jobs they might have held without a post-secondary education. Some former students are unable to find a job at all. These financial “losers” include disproportionate numbers of those who dropped out without finishing a degree, those who graduated without skills that were saleable in the labour market, and those who were simply unlucky, never managing to find steady and remunerative employment after leaving full-time studies. These borrowers might be considered “can’t pay” defaulters, as opposed to “won’t pay” defaulters, who default because of their unwillingness to
repay.This often-heard distinction between “can’t pay” and “won’t pay” defaulters reflects one of the implicit moral judgements that accompany the policy debate about student loan default. It implies a clear distinction between one group of honest, but unfortunate defaulters, and a second group who knowingly abuse the system in order to avoid repayment. However, this distinction can be quite blurry. Even an honest but unfortunate borrower, faced with severe financial difficulty, must decide which payments must be made and which can be put off. Depending on the specific circumstances, student loan repayment may not be at the top of the list for all borrowers.
What proportion of defaulters fall into the “can’t pay” category? Some evidence on this point is available from several academic studies of default in the American Guaranteed Student Loan program, which operated much like the CSLP did before the introduction of “risk-sharing” in 1995. These studies exploit the National Postsecondary Student Aid Study (NPSAS), which is a source of excellent data for studying default.
The NPSAS data contain (1) a variable indicating whether individuals defaulted on their student loans; (2) a measure of individual postschooling earnings; (3) a set of variables capturing other characteristics of the borrower; and (4) a set of variables that characterize the borrower’s educational institution. If all defaulters were simply unwilling to repay their loans even though they had the means to do so, then post-education earnings would be uncorrelated with default. High-earning former students would be just as likely to default as low-earning former students. If the opposite were true—if all defaulters were willing to repay, but simply lacked the means to do so—then earnings would be the decisive factor in determining whether or not a borrower defaulted. The studies based on the American data are quite clear. The level of earnings is a statistically significant and substantively important correlate of default. Those with low earnings are more likely to default than those with high earnings. Mark Dynarski wrote that “earnings … [have a] major [impact] on the likelihood of defaulting.” He estimated that a 1 per cent decline in earnings would lead to a 0.3 per cent increase in the probability of default. J. Fredericks Volkwein and Bruce Szelest wrote that “significant decreases in default probability are produced by … current earnings.” When the NPSAS directly asked defaulters why they had defaulted, 73 per cent responded that they were “unemployed and without income.”
As part of its recent evaluation of the CSLP, Human Resources Development Canada (HRDC) asked Goss Gilroy Inc. to survey a group of CSLP borrowers. Using that survey, I found that earnings were even more important in the Canadian context than in the American. Among Canadian borrowers, a 1 per cent decline in earnings was estimated to lead to a 0.8 per cent increase in the probability of default.41 Further evidence on this point comes from the final report of the committee reviewing the British Columbia Student Assistance Program, which stated that “[t]he Ministry of Finance’s Loan Administration Branch estimates that 30 per cent of student loan defaulters are able but unwilling to pay. This leaves 70 per cent who are willing to pay but whose circumstances are such that they cannot make the required payments.”
In 1990, the auditor general wrote that 44 per cent of defaulters who were contacted refused to cooperate, perhaps reflecting an unwillingness to repay. However, the dichotomy of “cooperate” versus “refuse to
cooperate” is not the same as “able to pay” and “unable to pay.”

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