Default Rate on Federal Student Loans Rises Again

September 30, 2012

The percentage of borrowers defaulting on their federal student loans within two years of beginning repayment rose again last year, though some default measurements appear to have stagnated, according to government data released on Friday.

Of borrowers who entered repayment from October 1, 2009, to September 30, 2010 (the cohort for the 2010 fiscal year), 9.1 percent had defaulted by September 30, 2011, up from the 8.8-percent two-year default rate set the previous year.

But expanding that tracking window by a year, which the department formally did for the first time this year, shows that 13.4 percent of borrowers who entered repayment during the 2009 fiscal year, or 489,040 people, defaulted within three years.

The two-year default rate has climbed steadily for the past several years, and observers had mixed views of the latest increase, of three-tenths of a percentage point.

"While it's too soon to tell whether this signifies a leveling-off of recent dramatic increases" in the cohort default rate, it is encouraging that the rate of increase has slowed, Justin Draeger, president of the National Association of Student Financial Aid Administrators, said in a written statement. Still, the statement added, it is an "unsettling trend" that the default rate is now more than double its historic low—4.5 percent for the cohort that entered repayment in the 2003 fiscal year.

Default rates, which are released annually, are important to colleges because they are a factor in eligibility for federal student-aid programs. Colleges are barred from receiving federal student aid if their two-year default rates are 25 percent or higher for three consecutive years or if they spike above 40 percent in a single year.

On Friday the Education Department announced that two institutions—the Centro de Estudios Multidisciplinarios, in San Juan, Puerto Rico, and Tidewater Tech, in Norfolk, Va.—had failed to meet the standard and, barring a successful appeal, would lose eligibility for federal student-aid programs.

The department is now moving to track defaults for three years after borrowers enter repayment, with colleges becoming ineligible for federal student aid if their rate is 30 percent or greater for three consecutive years or exceeds 40 percent in a single year. Although official three-year rates were released for the first time this year, institutions will not face sanctions under the new measurement until September 2014.

The official three-year default rates showed a small decrease from the trial rates the department has issued in the past several years, but they still indicated that many more institutions would be in jeopardy of losing eligibility if that higher standard were applied this year. The department said 218 institutions had three-year default rates above 30 percent; 37 of those institutions had three-year default rates higher than 40 percent.

Of the colleges that would not meet the new standards, 160 are for-profit, 35 are public, and 23 are private. Fourteen of those 218 institutions are historically black colleges and universities, which include 11 private and three public institutions.

The two-year rate of default at for-profit institutions dropped several points from previous years, but that sector continued to have the highest average default rates over all. Looking at a three-year window after beginning repayment, 22.7 percent of borrowers at for-profits defaulted (up slightly from last year) compared with 11 percent at public institutions and 7.5 percent at private colleges.

Students at for-profit colleges also accounted for a disproportionate share of the defaults. They represented slightly more than a quarter of the borrowers in the cohort but had nearly half of the defaults.

Critics have alleged that for-profit institutions artificially lower their default rates by getting borrowers into forbearance and deferment in order to delay defaults so that they occur outside the two- or three-year time frame that the government tracks.

The decrease in default rates this year among for-profit colleges "has much more to do with default-management tactics than it does with students actually repaying their loans," said Debbie Cochrane, research director at the Institute for College Access and Success.

For-profit colleges "are telling their investors that it's about gaming the rates," she said. "It's not about improving student outcomes."

In a written statement on Friday, Steve Gunderson, president and chief executive officer of the Association of Private Sector Colleges and Universities, the main lobbying group of the for-profit sector, said that "student-loan defaults are a serious problem for everyone." But he pointed out that for-profit colleges tend to enroll underserved populations, like working parents and first-generation college students.

For-profit institutions have argued that the financial disadvantages of their students contribute to their high default rates.

To reduce default rates, Mr. Gunderson suggested that the Education Department improve its management of debt collection and that Congress empower individual institutions to limit student borrowing.

Searchable databases on the two-year default rate for the 2010 cohort and the three-year default rate for the 2009 cohort are available on the Education Department's Web site.

Corrections (10/1/2012, 12:27 p.m.): This article originally reported incorrectly that the three-year rate of default at for-profit institutions had dropped several points from previous years; in fact, it went up slightly, from 22.3 percent to 22.7 percent. And the article originally stated incorrectly that historically black colleges were exempt from default-rate sanctions from the Education Department. That exemption expired in 2004. The article has been updated to reflect those corrections.

Clarification: The article originally stated that 14 historically black colleges would not meet the new standards. That sentence was rewritten to reflect the other types of colleges that would also not meet the new standards.