October 31, 2013
Student Loan Default Rates Rise for Sixth Year
New data show more than 600,000 borrowers have defaulted on their loans in the last few years
The number of borrowers who defaulted on their student loans two and three years after entering repayment have continued to increase in the last several years, according to new data released Monday by the Department of Education.
The department measures colleges' "cohort default rates," which track the number of borrowers who default within a certain period of time. The national two-year cohort default rate rose from 9.1 percent in fiscal year 2010 to 10 percent in the fiscal year 2011. Similarly, the three-year cohort default rate rose from 13.4 percent in 2009 to 14.7 percent in 2010.
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Two-year default rates measured the number of borrowers whose loan repayments began in the 2011 fiscal year and defaulted (by failing to make payments for 270 days) before Sept. 20, 2012. In that cohort, more than 475,000 defaulted on their loans. Three-year default rates were calculated based on borrowers whose first payments began in the 2010 fiscal year and who defaulted before Sept. 30, 2012. Of the more than 4 million borrowers in that cohort, approximately 600,000 defaulted in that period.
"The growing number of students who have defaulted on their federal student loans is troubling," said Secretary of Education Arne Duncan, in a statement. "The Department will continue to work with institutions and borrowers to ensure that student debt is affordable."
Starting in 2014, the department will only calculate three-year cohort default rates because more borrowers default after two years of repayment. A three-year observation, the department says, will better reflect the number of borrowers who default on their loans.
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The default rates, which are released annually, factor into how the department decides which colleges and universities will be allowed to receive federal student aid. Institutions lose their eligibility when they have two-year default rates of higher than 25 percent for three consecutive years or rates of more than 40 percent for one year.
Although the three-year cohort default rate at for-profit colleges decreased from 22.7 percent to 21.8 percent, these institutions continue to have the highest average default rates for both cohorts. Private, nonprofit colleges had the lowest rates at 5.2 percent for the two-year cohort and 8.2 percent for the three-year cohort.
Despite the small improvements, for-profit colleges are still scrutinized for historically having higher debt-to-income ratios among their graduates, as well as higher default rates. An analysis of the new data by The Institute for College Access and Success alleges that some institutions attempt to distort their default rates by pressuring borrowers to delay their payments.
The organization cites a recent investigation the Department of Education conducted that identified several former students at a for-profit institution who said they were pressured into applying for forbearance to avoid default during the cohort monitoring period, rather than seeking other repayment options. Borrowers who are experiencing financial struggles may qualify for forbearance and can postpone loan payments for up to one year.
"Some colleges are simply masking default problems until the federal government stops watching," TICAS Vice President Pauline Abernathy said in a statement. "These kinds of deceptive tactics protect colleges while putting students and taxpayers at even greater risk after the school is off the hook."
President Barack Obama has emphasized a need for greater outreach to students to ensure they are aware of more flexible and income-driven repayment options, both before they take out loans and before they being repayment, and also suggested that default rates should be a factor in his proposed college rating system that would tie federal financial aid to college performance measures of quality and affordability.
In his Aug. 22 speech announcing the plan, Obama proposed making all federal loan borrowers eligible for the Pay As You Earn program, which caps monthly loan payments at 10 percent of a borrower's income. Currently, students who first borrowed before 2008 or have not borrowed since 2011 are not eligible for the program.
In order to increase awareness, Obama suggested launching an enrollment campaign to reach out to struggling borrowers, an endeavor which Duncan told The New York Times the department will begin this month.
Despite the fact that millions of borrowers are currently in default, fewer than 10 percent are enrolled in an income-based repayment plan, according to recent data from the Consumer Financial Protection Bureau.
"The more than 600,000 borrowers who defaulted on their loans in the last few years deserved to know all their options before it was too late," said Lauren Asher, president of TICAS, in a statement. Obama's proposal to expand outreach to certain borrowers, Asher said, "is sorely needed to keep more borrowers from falling through the cracks."
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