Student-Loan Default Rates Continue Steady Climb

October 01, 2013

The percentage of borrowers who defaulted on their federal student loans within two years of starting repayment has increased for the sixth year in a row, while the rate for defaults measured over a three-year period rose by a similar amount, according to figures released on Monday by the U.S. Department of Education.

The latest two-year default rate, which applies to borrowers who began repaying loans from October 1, 2010, to September 30, 2011, was 10 percent—the highest rate in nearly two decades. It was up from 9.1 percent among the previous year's cohort.

The Department of Education is in the process of changing its standard for measuring loan-default rates, from a two-year span to a three-year span. The latest three-year rate, which applies to borrowers who began repayment during the 2010 fiscal year, was 14.7 percent, up from 13.5 percent among the previous year's cohort, the first to be measured over three years.

"The growing number of students who have defaulted on their federal student loans is troubling," the secretary of education, Arne Duncan, said in a news release. "The department will continue to work with institutions and borrowers to ensure that student debt is affordable."

Default rates, which are released annually, are used by the Department of Education to determine whether colleges are eligible to receive federal student aid. Institutions with default rates of 25 percent or higher for three consecutive years, or 40 percent or higher in any single year, cannot receive federal student aid.

But starting next year, the department will calculate only three-year rates, which it notes are more indicative of the percentage of borrowers who eventually default on their loans. The new standard will bar federal aid to colleges with default rates of 30 percent or higher over three consecutive years, or 40 percent in a single year.

In the latest cohort, 221 institutions had default rates of 30 percent or higher, up from 218 last year. A Chronicle analysis found 104 institutions that appeared on both the 2009 and 2010 lists, including Concordia College Alabama, Mohave Community College, and Rust College.

Eight institutions face sanctions for failing to meet the two-year standard, up from two last year. They are:

  • Florida Barber Academy, in Pompano Beach, Fla.
  • Henri's School of Hair Design, in Fitchburg, Mass.
  • Huntington School of Beauty Culture, in Huntington, W.Va.
  • John Wesley International Barber & Beauty College, in Long Beach, Calif.
  • New Age Training, in New York, N.Y.
  • Pacific Coast Trade School, in Oxnard, Calif.
  • Palladium Technical Academy, in El Monte, Calif.
  • Tidewater Tech, in Norfolk, Va.

Institutions can appeal their published rates, and guidelines for the process are available on the Department of Education's Web site.

Default rates have special relevance this year, as they have been identified by the Obama administration as a possible factor in its proposed rating system for determining the federal aid allowance to colleges. "Our economy can't afford the trillion dollars in outstanding student-loan debt, much of which may not get repaid because students don't have the capacity to pay it," President Obama said in a speech in August introducing the proposal.

Loan-repayment rates have also been discussed as part of the Department of Education's proposed "gainful employment" rule. Under draft language for the rule, career-oriented programs—not whole institutions, which are judged by the latest data—would not be eligible for federal student aid if their loan-repayment rates did not exceed a certain measure.

The "alarming" rate of increases underscores the importance of an income-based repayment plan, an Obama-administration proposal, said Debbie Cochrane, research director for the Institute for College Access and Success. The proposal would cap borrowers' federal student-loan repayments at 10 percent of their monthly income.

The latest three-year default rates were highest among for-profit institutions, but dropped slightly from the previous year—from 22.7 percent to 21.8 percent. The three-year rate for public institutions was 13 percent, and for private institutions it was 8.2 percent.

Borrowers who attended for-profit colleges represented about 32 percent of all borrowers entering repayment in the 2011 fiscal year, up from 28 percent in the 2009 year, and for-profit-college students accounted for 43 percent of the defaults.

But leaders in for-profit education have defended the high rates by pointing out that students enrolled in for-profit colleges typically have greater financial disadvantages.

Jonah Newman contributed to this report.

Correction (10/2/2013, 2:10 p.m.): The original versions of the charts titled "Loan-Default Rates Continue to Climb" and "Cohort Default Rates by Sector" included several percentages that were too low by one tenth of one percent. The charts have been updated to reflect the correct rates. The federal government's shutdown prevented The Chronicle from ascertaining the source of the error.