Default Rate on Federal Student Loans Jumps to 8.9%, a Nearly 2-Point Rise

May 20, 2011

The rate at which students defaulted on their federal loans in the two-year period ending September 30, 2010, was 8.9 percent, an increase of nearly two percentage points over the two-year rate for the previous year, according to draft data released on Friday by the U.S. Department of Education.

In raw numbers, that two-year rate translates into nearly 90,000 more people in default than in the previous year, when the default rate was 7 percent. The data show that, of nearly 3.7 million borrowers who were slated to begin repaying their loans from October 1, 2008, to September 30, 2009, a period of rising unemployment and economic slowdown, 327,669 defaulted within two years.

Students at for-profit colleges, who make up about 10 percent of the nation's college enrollments, accounted for nearly half of all the defaults—47 percent—the draft data show. A year earlier, that proportion was 43 percent.

The overall two-year default rate for students at for-profit colleges also rose. It was 15.2 percent, up from 11.6 percent in the previous year and 11 percent the year before that.

The default rate for public colleges was 7.3 percent, and for private, nonprofit colleges it was 4.7 percent, according to the draft data. Those rates, too, increased from prior years but not by as much. Last year the official two-year default rate for public colleges was 6 percent, and the year before it was 5.9 percent. For private, nonprofit colleges, last year's two-year rate was 4 percent, and the year before it was 3.7 percent.

Officials at for-profit colleges say that their students default at higher rates because a majority of them are poorer to start with and face many more financial challenges. Critics of the colleges say their high default rates show that many of those institutions are loading up their students with unaffordable debt that the students cannot repay once they graduate or drop out.

The findings are based on draft data on individual institutions that the department sends to all colleges in February. Institutions can appeal the calculations until September, when the official calculations become final and individual rates for more than 5,700 institutions are published.

Currently, colleges are barred from federal student-aid programs if their two-year default rate is 25 percent or higher for three successive years, or above 40 percent in a single year. Under a law that will take full effect after September 30, 2014, the default rate will be measured for three years and colleges with three-year rates of 30 percent or higher for three successive years, or above 40 percent in any single year, will be barred.