ANALYZING POSTSECONDARY RETURNS: DOES EDUCATIONAL LOAN DEFAULT PLAY A ROLE?

I. INTRODUCTION Leslie and Brinkman (1988) provide comprehensive surveys of the large and well established literature on the economic returns of college degrees relative to high school educations. Little is known, however, about how the economic benefits vary with the type of postsecondary education received. As enrollments grow in vocational programs, an evaluation of the effectiveness of these programs and of the federal policies used to subsidize them becomes imperative. Although government statistics only recently have included data on enrollments in vocational programs, McPherson and Schapiro (1991, pp. 139144) provide anecdotal evidence that enrollments grew substantially throughout the 1980s. The limited research in this area shows clear economic advantages for baccalaureate educations relative to both vocational and associate programs. In most of these income studies, researchers control for variables that directly influence earnings as well as variables that control for elements of discrimination or capture personal traits of the student that also affect earnings. This paper extends the existing literature by further controlling for individual characteristics that typically go unmeasured. Using a micro-data base of students who participated in the federally guaranteed student loan (GSL) program - also known as the Stafford Loan program - the analysis here estimates annual incomes and includes the status of the educational loan as a regressor. Intrinsic personal attributes of commitment and responsibility that contribute to the decision not to repay the student loan also significantly influence one's earnings. Therefore, guaranteed student loan defaulters, ceteris paribus, should have significantly lower incomes than those who either still are repaying or have paid in-full their educational loans. Previous income analyses suggest that graduating from the postsecondary program partially captures these characteristics of motivation and initiative (see Grubb 1992, 1993). Graduating not only adds to an individual's productive capability but also signals intrinsic personal traits that employers prefer and also reward with higher incomes. Yet, these studies make no clear distinction between the productivity and signaling elements that graduation confers on incomes. The empirical model in the analysis here includes whether the individual completed the postsecondary program as well as whether he/she defaulted on the educational loan that helped finance the education, thus clarifying the distinction. Although the analysis here includes only past participants of the GSL program, the empirical findings confirm that post-schooling incomes vary dramatically depending upon the postsecondary program attended. Of particular interest, the results show that students who default on their educational loans earn significantly lower incomes than do non-defaulters. II. METHODOLOGY A. Data The data used to analyze postsecondary labor market returns are from the National Postsecondary Student Aid Study - Student Loan Recipient Survey (NPSAS). The National Center for Educational Statistics (NCES) collected this data base in 1988. The NCES surveyed past participants of the GSL program who had left their institutions between 1976 and 1985 and who were still servicing, had paid in-full, or had defaulted on their GSLs. The NPSAS data are especially valuable because they contain a vast array of information about the student's personal background, type of postsecondary education, and employment record. The full data base contains information on over 8,000 guaranteed student loan borrowers. However, the empirical work in this paper uses only those students who attended either non-degree or degree vocational, associate, or baccalaureate programs. Since economic returns differ among undergraduate and graduate degree holders, the analysis eliminates individuals who had borrowed for a post-undergraduate program such as a Master's, Ph. …