NAICU Washington Update

First Glimpse of Three-year Default Rate Isn't Pretty

December 18, 2009

The Department of Education has given a first glimpse of the new three-year cohort default rate (CDR) for institutions, and as expected, the extra year, combined with the souring economy, caused most colleges' default rates to rise. 

According to a Wall Street Journal analysis, the default rate change across all sectors went from 7 percent to 12 percent.  The greatest increase was in the for-profit sector, where the rate rose from 11 to 21 percent.  The rates for public and private four-year colleges went from 4 to 7 percent, and 4 to 6 percent respectively.  Two-year public and private college default rates went from 10 to 16 percent, and 9 to 16 percent.  

The change in CDR time frame was enacted in the 2008 Higher Education Act reauthorization.  The change grew out of concern that some institutions were helping students avert default for two years after completion, so that their default rates looked lower.  Another factor was that changes in repayment requirements have made it less likely for defaults to occur in the first two years.  Since the new rates are not official at this point, colleges with rates over 30 percent will not yet be subject to sanctions.

Several federal student loan repayment plans that are based on a borrower's income - income based repayment and income contingent repayment - should help students unable to pay their loans avoid default.

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