Student-Loan Default-Rate Climbs as Economy Falters

September 12, 2011

As students carry off more debt after college and venture into the recession-beaten job market, it's no surprise that more are defaulting on their student loans. In the 2009 fiscal year, the "cohort default rate" on student loans climbed to 8.8 percent, up from 7 percent in the previous year, according to a U.S. Department of Education report released on Monday.

That means that out of 3.6 million student-loan borrowers whose first repayment period landed between October 1, 2008, and September 30, 2009, about 320,000 people defaulted before September 30, 2010.

The climb in the 2009 cohort default rate—which measures what proportion of students defaulted within two years of entering the repayment period—was highest at for-profit institutions, rising to 15 percent from 11.6 percent in 2008. At public institutions, the default rate jumped to 7.2 percent, up from 6 percent the previous year, and at private universities, the rate edged up to 4.6 percent from 4 percent in the previous year.

The figures for each higher-education sector, not much changed from those in a preliminary estimate issued in May, represent a faster climb in default rates, compared with how they changed from 2007 to 2008.

By state, the largest default rates among students from for-profit institutions were in Indiana (19.6 percent), Michigan (18.6 percent), and Nevada (18.3 percent). For students entering repayment from public institutions, Arkansas, as in the previous year, had the highest default rate (12.3 percent), followed by Mississippi and Oklahoma. And for students from private institutions, West Virginia led the pack at 8.6 percent.

Role of For-Profits

James R. Kvaal, deputy under secretary of education, said in a news conference that two trends were causing default rates to rise. First, the economic outlook has continued to dim for college graduates. (In August, the United States added net zero jobs and the jobless rate stood at 9.1 percent, according to the Bureau of Labor Statistics.) There's a strong correlation between student-loan default rates and unemployment rates, as well as credit-delinquency rates, Mr. Kvaal said.

Second, he said, the growth in for-profit colleges, which have a disproportionately high student-loan default rate, has pushed up the overall rate. In fact, more than half of the total increase in the number of defaulters from 2008 to 2009 arose from the for-profit sector. There were 81,000 more defaulters in 2009 than in 2008, and 49,000 of them, or about 60 percent, came from the for-profit side.

Debbie Cochrane, a program director at the Institute for College Access & Success, said it's hard to isolate one reason why default rates are more pronounced at for-profit institutions. There have been allegations of deceptive or fraudulent recruiting practices in the sector, including misrepresenting college graduation rates to potential students to encourage them to enroll and take out loans, Ms. Cochrane said.

"There have been a number of instances recently where colleges were found or have been accused of misrepresenting their placement rates," she said. "Students who enroll in a particular college and agree to take out debt do so with an understanding that they will receive training that will lead to a career or a job. When that information is inaccurate or misleading, students can't make the best decisions."

Brian Moran, interim president and chief executive of the Association of Private Sector Colleges and Universities, the chief lobbying organization for proprietary colleges, said in a statement that many for-profit institutions have "taken a wide variety of remedial steps, including ramped-up debt counseling, to bring [default] rates down."

The association "will continue working with its member schools to curb defaults and to assure that borrowers are getting all the information they need to manage their debts responsibly," Mr. Moran said. "Private-sector college and university students are individuals working hard to build better lives, but are meeting this challenge with fewer economic and social advantages."

Still, U.S. Sen. Tom Harkin, an Iowa Democrat who has led a series of high-profile hearings on proprietary colleges' recruiting practices, said in a statement that the new data "should give us further concerns about whether some for-profit colleges are doing enough to help their students succeed."

Criticizing the sector's high tuition costs and drop-out rates, he said, "it is clear that the for-profit education industry needs greater oversight in order to ensure that students and taxpayers are getting a value for their investment in these schools."

Losing Aid Eligibility

In 2011, five institutions—four proprietary and one private—will lose eligibility for one or more federal student-aid programs because they had default rates of 25 percent or higher for at least three years, or 40 percent in the latest year. Five institutions were also penalized last year.

Mr. Kvaal said hundreds of colleges lost eligibility in the 1990s, when default rates were significantly higher.

In 1995, the overall default rate stood at 10.4 percent. It dipped to 4.5 percent in 2003, but the following year, as tuition at colleges and borrowing continued to rise, the default rate began climbing again, as well. According to the nonprofit Project on Student Debt, the average loan-borrowing senior graduated with $24,000 in debt in 2009, up 6 percent from the previous year.

For student borrowers, the consequences of defaulting on their loans shortly after leaving college could follow them for years. A default could severely damage their credit, hurting their chances of being able to buy a car, rent an apartment, or buy a house. It could even lead to a federal lawsuit or wage garnishment.

Education Department officials "work very hard" to recover the money, Mr. Kvaal said.

"The most important thing to do is try to help them [students] avoid falling into default in the first place," he said.

In an interview, Mark Kantrowitz, publisher of FinAid, a Web site with information on student aid, said he did not necessarily agree with the idea that for-profit colleges alone were causing rates to rise. Rather, he said, the for-profit institutions enroll more lower-income students, who are less likely to graduate than are other students. Students who fail to graduate are three times as likely to default on their student loans, Mr. Kantrowitz said. In the end, the unemployment rate, graduation rates, and interest rates drive the default rate.

"If you don't have a job, you can't pay back your loans," he said. "If you don't graduate, you can't get a job good enough to pay back your loans."

Mr. Kantrowitz said in June the unemployment rate for people with bachelor's degrees was 4.3 percent—less than half the rate for people with only a high-school diploma. Still, the unemployment rate for people with bachelor's degrees is double what it was before the recession, he said. As for the next few years, Mr. Kantrowitz said he wouldn't be surprised to see the default rate drop with the unemployment rate—if indeed the economy does recover.