The Effects of School Selectivity on Student Loan Default Rates

The student debt crisis is one of the most prominent financial problems facing the United States today. As of 2018, the student loan market is now the largest source of non-mortgage household debt in the United States. Using data from 4-year public universities in the United States from 2013 to 2018, I examine the relationship between school selectivity and student loan default rates. I employ an OLS model with measures of selectivity defined as ACT scores of incoming freshmen and admission percentages of universities. Where higher ACT scores and lower admission percentages signify an increase in school selectivity, I find a negative relationship with ACT scores and default rates. These results are robust across model specifications and imply that higher ACT scores lead to a decrease in the chance of loan default. I suggest education policy changes, such as a personal finance seminar for incoming freshmen at low-selectivity schools, could lead to decreases in default rates