NAICU Washington Update

Three-Year Student Loan Defaults Are Double Two-Year Rates

February 11, 2011

The Department of Education has released three-year student loan cohort default rates, and the numbers are troubling.

Although high default rates will not carry penalties until 2014, the report released February 3 - like those in 2010 and 2009 - show that rates will increase. In fact, the three year student loan cohort default rate (CDR) for loans going into repayment in 2008 is nearly double the two-year CDR for all sectors.

The default rate increase in the for-profit sector is particularly alarming. Students at for-profits who entered repayment in 2008 had a two-year rate of 11.6 percent, but a three-year rate of 25 percent. Public four-year colleges went from 6.0 to 10.8 percent, while public two-years went from 10.1 to 17.9.  Private four-year colleges went from 3.8 to 7.3 percent.

The change to three years in the CDR calculation was a provision of the Higher Education Act of 2008. It was in response to concerns that the two-year rate didn't provide an accurate picture of students struggling with debt, because some schools were "managing" the debt during the two-year period in which the CDR was calculated.

The department provided the 2008 three-year "trial" default data (and, earlier, the data for 2005, 2006, and 2007) for informational purposes only, so that institutions could get an idea of what the new rates would be like. Because they are informational, they were not subject to any appeal, as will be the case when the rates are official. The official two-year CDR for 2008 was published in September 2010. The two-year draft CDRs for loans going into replayment in 2009 will be sent to schools on February 14, 2011.  The official two-year rates will be published September 12, 2011.

About a half million of the nearly 3.4 million students entering repayment status in 2008 would be considered in default under the three-year measurement. Approximately 222,000 (47 percent) of the defaulters attended for-profit colleges, 186,000 attended public colleges and 58,000 attended private nonprofit colleges.

Under the current rules, colleges with two-year default rates of 25 percent or greater for three consecutive years can lose eligibility for federal student aid. Under the three-year rule, colleges with three-year default rates of 30 percent or higher for three consecutive years could lose eligibility. Nearly 200 colleges had three-year rates of 30 percent or more and, of those, about 40 colleges had rates of 40 percent or more.  An institution with a 40-percent default rate in a single year also would lose eligibility.

Neither the two-year nor the three-year CDRs include as defaulters borrowers who are in income-contingent, or income-based repayment, in forbearance, or in deferments. In contrast, the repayment rates slated to be used in conjunction with the yet-to-be-final gainful employment regulation will be more or less the obverse of the CDR, i.e., with the higher the rate the better.

Click here to access the Department of Education's Excel spreadsheet with three-year CDR data sortable by institution.

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