NAICU Washington Update

Student Loan Default Rates: On the Up and Up

September 17, 2010

The Department of Education's release of institutional cohort default rates (CDRs) early this week, received considerable media attention. For the second year, the overall average rose, as did the sector rates. This follows decreasing rates for the preceding decade.

The overall cohort default rate FY 2008 (October 1, 2007, to September 30, 2008) was 7.0 percent, up from 6.7 in FY 2007, and the highest it's been since 1997.  The total number of defaults, 238,852, was the greatest number of defaults since 1992.

The rate of defaults increased the most in the for-profit sector, up from 11.0 in FY 2007 to 11.6 in FY 2008. Public institutions increased slightly from 5.9 to 6.0 percent, while private nonprofit colleges rose from 3.7 percent to 4.0 percent.  (In FY 2006, the private sector rate was 2.5 percent.)  All sectors have slightly lower rates when just 4 year schools are considered.

Cohort default rates are a count of the number of federal student loan defaulters in about a two-year period. Many defaults are excluded because they occur beyond that period, or outside the default collection "window."  To get a more comprehensive view of borrowers failing to pay their loans, the Department created a "loan repayment" indicator to evaluate "gainful employment" programs.

This new formula considers loans as being in repayment only if the borrower has paid off the loan or is making payments that reduce loan principal.  Under this formula, most loans in forbearance or deferment aren't counted as being repaid.  This means that a college could have a large discrepancy between its cohort default rate and its loan repayment rate.  (See related Washington Update story on gainful employment)

No doubt, much of the media attention on the CDR numbers this year resulted from the spotlights Congress and the Department of Education have cast on student debt and loan defaults as a factor in for-profit sector concerns.  Even Education Secretary Arne Duncan commented on the increase, and the for-profit sector's contribution to it: 

"The data also tells us that students attending for-profit schools are the most likely to default.  While for-profit schools have profited and prospered thanks to federal dollars, some of their students have not.  Far too many for-profit schools are saddling students with debt they cannot afford in exchange for degrees and certificates they cannot use.  This is a disservice to students and taxpayers, and undermines the valuable work being done by the for-profit education industry as a whole." (See the full Department of Education news release)

MORE News from NAICU