Student Loan Defaults on the Decline, But Still Higher Than in Past

For the first time in years, student loans that are in default have declined, but remain substantially above levels prior to the recession, according to a statement from the Department of Education last week.  Of borrowers in their third year of repaying their loans, as of a year ago, 13.7% had defaulted, which was down from 14.7% in 2012, writes Richard Pérez-Peña of The New York Times.

There are 21 schools that have such high default rates they could lose eligibility to receive federal student grants and loans under federal law. This amounts to a death sentence for almost any higher education institution.  The majority of the 21 schools are small trade schools and are for-profit.

Although there were other schools that did not meet federal default standards, the department manipulated its calculations a bit, and these schools will not face any sanctions. Under the law, if a school has a default rate of 30% or more for three years in a row, or 40% for one year, that school will lose access to federal funds.  A for-profit industry spokesman argued that the government’s adjustment of figures for some schools spotlights flaws in the way it assessed performance.

“The rate’s still much higher than it should be,” said Debbie Cochrane, research director at the Institute for College Access and Success, a research and advocacy group. “I don’t think we should be celebrating that colleges have fewer than 30 percent of their students defaulting. That’s a pretty low bar.”

The situation is more dire than the calculations show since borrowers are not counted in the default column until they have failed to make payments for almost a year.

The three-year cohort default rates, used to determine which institutions are eligible for federal funding, are calculated based on borrowers whose “first payments began in the 2011 fiscal year and who defaulted within three years of entering the repayment period”, reports Allie Bidwell writing for US News and World Report.  More than 4.7 million who entered repayment at that time and approximately 650,000 defaulted, according to the Department.

“While it’s good news that the default rate decreased from last year, the number of students who default on their federal student loans is still too high, and we remain committed to working with postsecondary education institutions and borrowers to ensure that student debt is manageable,” Education Secretary Arne Duncan said in a statement. “The Department will continue our efforts to help borrowers by providing more flexible repayment options and better counseling and information. We will also continue working with institutions to ensure they are providing their students with the information and guidance the students need to repay their loans after they graduate.”

In an article written for Forbes, Jason Delisle and Claire McCann say that the number of people failing to make a student loan payment is larger than the 13.7% reported by the Department of Ed.  There are two other default rates that are more comprehensive and are reported months earlier than the three-year cohort rate.

The cumulative cohort tracks loans in a cohort beyond the three-year measure used by the more discussed measure. Using this formula for community colleges, 25.8% of borrowers have defaulted to date. Borrowers at for-profit two-year colleges, which often have higher borrowing rates, have a 36.3% default rate.

The other measure is the budget lifetime default rate.  These rates measure the projected total defaults from each cohort over 20 years. Two-year institutions for the 2011 cohort have 33.8% of loans at private non-profit and public colleges expected to default and nearly half at two-year for-profit schools are expected to default. Taking all school types into the equation, the Department of Education reports that over one in five loans for undergraduate educations will default in the next two decades.

BloombergBusiness’s Janet Lorin quotes an education advocate on her description of the decline.

“The drop is almost certainly the result of multiple things, including an improving economy, greater school focus on preventing default rates, some for-profit colleges manipulating their default rates and increased borrower enrollment in income-driven repayment plans,” said Pauline Abernathy, vice president of the Institute for College Access & Success, a nonprofit research and advocacy group in Oakland, California.

President Obama and the Department of Education have attempted to lessen defaults by offering several income-based repayment plans. These programs allow borrowers to pay a certain percentage of their discretionary income.  Some borrowers can receive a deferral or forbearance because of continued education or economic hardship. Neither of these types of borrowers are included in default rates.