Level of Indebtedness

Although the opposite would seem to make more sense, borrowers with high indebtedness are actually less likely to default than borrowers with low indebtedness, perhaps because high indebtedness is associated with more schooling and thus more success, which is the main variable associated with low default (Woo 2002).
Borrowers who take out $5,000 or less in loans default at a considerably higher rate than all other borrowers. Not surprisingly, borrowers who take out small loan amounts are more apt to stay in school a short time and have lower graduation rates than other borrowers. That is, the loan amount is a partial proxy for education attainment (Steiner and Teszler 2003).
Other studies also found that the amount borrowed has either no effect or a beneficial effect on repayment. Having higher indebtedness is associated with lower default rates, perhaps because higher levels of indebtedness resulting from additional years of schooling and degree attainment allow borrowers to compete more successfully in the labor market for jobs and income (Volkwein et al. 1998).
Borrowers with small debts are more likely to default than those with large debts. It appears that the decision to incur additional debt by a borrower who is already in school is not as consequential as the initial decision to borrow in the first place (Woo 2002).
A study on how student borrowers perceive their education debt indicates that, although students who received Pell Grants as undergraduates (i.e. low-income borrowers) have debt and loan payment levels similar to overall averages, they report lower starting salaries and current earnings than other borrowers, resulting in higher average payment-to-income ratios that may make repayment difficult (Baum and O’Malley 2003).

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