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Default Rates Up Again

Default Rates Up Again
September 13, 2011

WASHINGTON -- As the recession took hold and unemployment rose at the turn of the decade, the proportion of borrowers defaulting on federal student loans continued to increase, according to Education Department data released Monday.

The two-year "cohort" default rate, which represents the proportion of federal loan borrowers who entered repayment between October 2008 and September 2009 and had defaulted on their loans by the end of September 2010, increased to 8.8 percent, the highest such rate since 1997. The rate increased 1.8 percentage points from fiscal 2008. And while students in all sectors were likelier to default on their loans than they had been the previous year, defaults increased the most at for-profit colleges: 15 percent of borrowers from those institutions defaulted in 2009, compared with 11.6 percent in 2008.

Defaults increased to 7.2 percent at public institutions, from 6 percent in the 2008 fiscal year. At private institutions, the default rate increased from 4 percent in 2008 to 4.6 percent in 2009.

The rates are the first to consist entirely of loans that entered repayment during the worst of the economic downturn, and Education Department officials pointed to the bad economic situation as a major factor in the increase in defaults. Defaults tend to increase as unemployment rises, and delinquency rates on other types of credit, such as mortgages and credit cards, increased during the same period, they said.

Cohort Default Rates from 2007 to 2009, by Type of Institution

 

 

FY 2007 FY 2008 FY 2009
Institution Type # of Schools Borrower Default Rate # of Borrowers Entered Repayment # of Schools Borrower Default Rate # of Borrowers Entered Repayment

 

# of Schools

Borrower Default Rate # of Borrowers Entered Repayment
Public 1,614 5.9% 1,721,629 1,618 6.0% 1,720,664 1,627 7.2% 1,778,903
Less than 2 yrs 144 7.5% 7,832 145 6.7% 7,736 142 9.9% 7,548
2-3 yrs 846 9.9% 483,721 848 10.1% 487,436 855 11.9% 520,256
4 yrs(+) 624 4.3% 1,230,076 625 4.4% 1,225,492 630 5.2% 1,251,099
Private 1,718 3.7% 778,296 1,702 4.0% 761,129 1,706 4.6% 825,221
Less than 2 yrs 46 12.6% 3,538 45 14.1% 3,794 43 14.5% 4,148
2-3 yrs 188 8.1% 14,798 180 8.2% 14,157 172 10.0% 15,039
4 yrs(+) 1,484 3.6% 759,960 1,477 3.8% 743,178 1,491 4.5% 806,034
For-Profit 2,008 11.0% 838,328 2,118 11.6% 889,034 2,147 15.0% 1,015,855
Less than 2 yrs 1,039 12.0% 129,627 1,105 12.4% 123,454 1,110 13.7% 130,936
2-3 yrs 702 12.5% 262,640 723 12.6% 272,215 732 14.8% 289,546
4 yrs(+) 267 9.8% 446,061 290 10.9% 493,365 305 15.4% 595,373
Foreign 435 2.2% 7,276 421 2.2% 7,902 425 5.5% 8,862
Unclassified 1 0.0% 5 1 0.0% 5 1 0.0% 5
Total 5,776 6.7% 3,345,534 5,860 7.0% 3,378,734 5,906 8.8% 3,628,846

But officials also pointed to booming enrollments at for-profit colleges as a contributing factor. Default rates have historically been higher for students at for-profit institutions. Nearly half of the 320,000 defaulting borrowers who began repayment in fiscal 2009 were enrolled at for-profit colleges, said James Kvaal, the deputy undersecretary for education, during a conference call with reporters.

“Many of those colleges offer excellent, innovative programs, but we do also see disproportionate default rates among students who are enrolled in those programs,” Kvaal said.

Since fiscal year 2005, default rates over all have nearly doubled, from 4.6 percent in 2005 to 2009’s 8.8 percent. Still, default rates are far from their peak in 1990, when 22.4 percent of students defaulted on their loans and the Education Department shut down dozens of programs.

The department cautioned that the actual default rate may in fact be higher, because many colleges encourage their students to seek forbearance or defer payments rather than go into default. While that sometimes can help students repay their loans, in many cases it just delays the default beyond the two-year window, Kvaal said. The Project on Student Debt called Monday’s figures “the tip of the iceberg,” noting that most defaults occur after two years.

Next year, the department will begin using three-year default rates to evaluate programs, meaning that the rate will increase. Trial three-year default rates for 2009 will be released in spring 2012.

Five institutions will lose eligibility for federal student loans due to high default rates: Tidewater Technical, in Norfolk, Va.; Trend Barber College in Houston; Missouri School of Barbering and Hairstyling in St. Louis; Sebring Career School, in Houston, and Human Resource Development and Employment-Stanley Technical Institute, in Clarksburg, W.V. Institutions must have default rates that exceed 40 percent in one year or 25 percent for three consecutive years to incur sanctions.

 

 

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