In Default-Rate Data, More Fuel for Fight Over Bank-Based Lending

The student-loan industry, which learned late Friday that its loan overhaul plan would save the government $13-billion less than legislation to end bank-based lending, got another bit of bad news on Monday, when the Education Department released its annual cohort default rates.

The data, which reflects the percentage of borrowers who entered repayment in the 2007 fiscal year and defaulted within the next two years, shows that the default rate was 2.4 percentage points higher for borrowers in the bank-based program (7.2 percent) than for those in the competing direct-loan program (4.8 percent). The discrepancy was even larger than the department had forecast back in March, when it released preliminary data that put the rates at 7.3 and 5.3 percent.

Both programs had higher cohort default rates than in 2006, when 5.3 and 4.7 percent of students with bank-based and direct loans defaulted, respectively. In a news release, Secretary of Education Arne Duncan blamed the rising rates on the economic downturn, and said the department was “reaching out” to current and prospective borrowers to educate them about their loan repayment options. Borrowers facing difficulty repaying their loans may qualify for a deferment, a forbearance, or an income-based repayment plan.

The department didn’t attempt to explain the discrepancy in defaults between the programs, but it did note that there are more for-profit colleges in the bank-based program than in direct lending. As usual, the 2007 rate was higher for borrowers who attended for-profit institutions (11 percent) than for borrowers who attended public colleges (5.9 percent) or private colleges (3.7 percent). Borrowers who attended for-profit institutions may be more likely to be working adults who have lost their jobs, said Brett E. Lief, president of the National Council of Higher Education Loan Programs.

“It’s disappointing and it reflects what is probably the first of a couple years of increases in default rates because of the economy,” he said.

The release of the data comes just three days before the U.S. House of Representatives is scheduled to vote on a Democratic bill to shift all loans to the direct-loan system. Supporters of the legislation are certain to draw attention to the default-rate data during debate over the measure.