Yes, undoubtedly, many people are taking out student loans that are too big. Most aren’t, and it appears that relatively few at the better 4-year colleges and universities are. Default rates are roughly twice as high at 2-year institutions as at 4-year institutions, and roughly 3 times as high at private for-profit schools as compared to either public 4-year schools or private non-profit 4-year schools. So a lot of this is just about predatory lending by unscrupulous for-profit institutions. And if you think about it, it’s just about a perfect rip-off opportunity—the schools get to originate the loans, they get paid by Uncle Sam whether or not the student ever graduates or learns anything of value, and there’s absolutely no consequence to them if the borrower defaults. Under the circumstances, it’s understandable that some not-for-profit institutions would be pretty lax, but they don’t have the same profit motive that for-profit schools do. For them, it’s been almost a license to print money.
If you drill down into the data, the pattern becomes even clearer. In Illinois, for example, the Dept. of Education’s College Scorecard shows 96% of Northwestern borrowers and 95% of University of Chicago borrowers are “paying down their debt.” Makes sense; these are elite private schools with high graduation rates whose graduates tend to do well in the job market, regardless of major. That figure is only slightly lower, 93%, at the public flagship. UIUC, but only 87% at the University of Illinois-Chicago, a secondary campus in the U of I system, and 83% at Northern Illinois, a second-tier “directional” state school. It’s a respectable 92% at the Illinois Institute of Technology, a pretty good private, engineering-heavy 4-year school; 90% at Knox, a pretty good private 4-year LAC; and 90% at Loyola, but only 83% at DePaul, the latter both private (Catholic) 4-year institutions. At the College of DuPage, a public 2-year college in affluent suburban Naperville, it’s only 61%; only 58% at Rock Valley College a public 2-year college in outstate Rockford; and only 54% at Highland Community College, a public 2-year institution in outstate Freeport. At the private, for-profit DeVry University-Illinois, it’s only 54%, and only 41% at both the University of Phoenix-Chicago Campus and American InterContinental University-Online, both private, for-profit 4-year “colleges.”
So, yes, a lot of students, especially at proprietary for-profit private colleges, are in over their heads financially, along with a substantial fraction of borrowers at 2-year colleges. The for-profits are the more problematic category, however. DeVry-Illinois enrolls over 20,000 undergrads, 82% of them borrow, and those who complete college carry an average debt load of $43,068. American InterContinental enrolls 10,000, 90% borrow, and its grads carry an average debt in excess of $35,000. In contrast, the public 2-year colleges are so cheap that relatively few students borrow, and those that do borrow much smaller amounts. For example, at Rock Valley CC (enrollment 7,400, average annual cost $4,920) only 9% borrow, carrying an average debt of just $6,900. It’s troublesome that so many default when the average monthly repayment would be a paltry $76, but at least the taxpayers aren’t on the hook for that much money.
By the way, I believe these default figures also include the 2010-2011 period when home mortgage default rates spiked to about 5.5% and credit card default rates rose to about 9%. Credit car defaults are the more comparable category because like student loans, that’s unsecured debt. So there’s still a disparity but perhaps not as great as your figures suggest.