AN ANALYSIS OF THE PROBABILITY OF DEFAULT ON FEDERALLY GUARANTEED STUDENT LOANS

Federally insured student loans constitute an area that is almost completely unexplored by researchers despite intense scrutiny that federally insured loans are receiving after the S & L collapse. Based on a probit model of default for two thousand guaranteed student loans, we find that individual characteristics (including parents' income, presence of two parents at home, student's graduation, and student's race) have a significant impact on default rates, while institutional characteristics (four year vs. two year college, private vs. public, school size, and individual school dummies) have little significant effect. The results imply that proposals to penalize colleges with "high" default rates are premature.