NAICU Washington Update

Loan Default Rates, PLUS Loan Denials Both Rise

October 16, 2012

The official overall two-year student loan default rate rose to 9.1 percent for the FY 2010 cohort, up from 8.8 percent for FY 2009, according to data released by the Department of Education in September.

The two-year rate for private nonprofit institutions, the lowest of the sectors, was 5.2 percent, up from 4.6 percent the previous year. The rate for public institutions went from 7.2 percent to 8.3 percent. The rate for-profit institutions rate decreased from 15.0 percent to 12.9 percent, but is still the highest percentage of any sector.

The two-year cohort default rate (CDR) is made up of defaults on loans that went into repayment between October 1, 2009, and September 30, 2010, and were defaulted before September 30, 2011.

Part of the decrease in the two-year cohort default rate for for-profit, or proprietary, schools may be the result of those institutions encouraging their students who have left school to apply for forbearance or deferment on the repayment of their loans.

While borrowers do not have to make loan payments while in such statuses, in most cases, interest on their loans continues to accrue. Schools benefit from this practice because these borrowers are considered as successfully repaying their loans and thus the school’s CDR is improved. Because of the added interest costs, these may not be good repayment options for borrowers.

First Official Three-Year Rates Released

The department also released three-year default rates for FY 2009, the first time official three-year rates have been reported. The three-year rate, which will replace the two-year rate in 2014, was 13.4 percent for the FY 2009 cohort, a slight decrease from the trial rate of 13.8 percent for FY 2008.

The three-year default rate for for-profit schools was 22.7 percent. The three-year rate for private nonprofits was 7.5 percent. For publics, it was 11.0 percent.

Default rates for individual schools or states can be found on the department’s website.

PLUS Loan Denials Jump 10 Percent

Unpublicized action taken by the Education Department in October 2011 to tighten eligibility for PLUS loans for parents has begun to result in an increase in loan denials, especially for lower income families. NAICU was alerted to the possibility of this problem several months ago and was the first to notify department staff, which at the time was unaware of a growing increase in loan denials.

The department now has acknowledged that new underwriting standards for the PLUS loan program have been made more stringent. Because the department did not convene a rule-making panel or issue a letter to colleges explaining the new standard, many schools and families have been caught unaware.

Halfway through AY 2011-12, 38 percent of applicants were denied, 10 percent more than the year before.

According to an expert in the field, the department was less strict about Direct Loan Plus approval when most of the loans were made through the bank-based FFELP program.

The department’s new standards now consider charge-off accounts and unpaid accounts in collections within five years. This is in addition to considering accounts that are more than 90 days delinquent, foreclosures, bankruptcies, tax liens, wage garnishment, or defaults within five years.

The department does not look at incomes or debt load. Denials can be appealed to the department.

Lack of access to PLUS loans could limit access to college, especially for students from low-income and minority families who are dependent on them, although denial enables the students themselves to borrow additional amounts.

It may also have adverse effects on some schools, particularly those that serve large portions of low-income students, where denial rates have been much higher than the average.

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