What’s Happening with Student Loan Defaults?

Sep 25, 2014

Data released yesterday by the Department of Education on student loan defaults:

The U.S. Department of Education announced today that the official three-year federal student loan cohort default rate has declined to 13.7 percent for students who entered repayment in FY 2011. That drop was across all sectors of higher education – public, private and for-profit institutions – even though an additional 650,000 students entered repayment in FY 2011 compared to FY 2010.  The default rate for FY 2010 was 14.7 percent.

What’s a default?  From CFPB:  

If you haven’t made a payment on your federal student loan for 270 days (nine months), and have not made arrangements with your lender or servicer that do not obligate you to make those payments, like deferment or forbearance, you are probably in default.

US News & World Report provides details on the methodology used to calculate default rates:

Three-year cohort default rates – which the department uses to determine which institutions are eligible to receive federal financial aid – were calculated based on borrowers whose first payments began in the 2011 fiscal year and who defaulted before Sept. 30, 2013. The three-year cohort tracks the percentage of a school’s borrowers who have defaulted on their loans within three years of entering repayment. Of the more than 4.7 million borrowers who entered repayment during that time, about 650,000 defaulted on their loans, the department said.

Here are the details:

Defaults vary significantly by school type:  private non-profit, public non-profit and for-profit (from DOE press release):

The three-year rate decreased over last year’s rates for all sectors, decreasing from 13 percent to 12.9 percent for public institutions and from 8.2 percent to 7.2 percent for private non-profit institutions. The default rate decreased at for-profit institutions from 21.8 percent to 19.1 percent, though the sector still has the highest three-year rate.

Why did these default figures come down over the past year?  Here is the Washington Post’s take:

For one, the economy is improving, Abernathy says. As more recent college graduates land jobs, it makes sense that more of them could pay back their loans. (Still, many of those jobs don’t require college degrees, causing some grads to feel underemployed.)

And the drop may not necessarily mean that more people are better about repaying their loans, says Ben Miller, a senior policy analyst for the New America Foundation. Some people may be avoiding default through options like deferment and forbearance, which delay payments, without requiring them to pay down their loans, he says. Some schools are also growing better at steering people to those programs to reduce their own default rates, he says.

The lower default rate may be also partly explained by a recent change to the way rates are calculated. The department announced this week that it reduced the default rates for some schools that were at risk of having their access to federal financial aid restricted because of high default rates. The changes were related to borrowers paying multiple loans who may have defaulted on one loan but continued to make payments on another loan, but the department said the number of students in that situation is minor.

WSJ notes that the methodology used by the government to calculate the default rate vastly underestimates the problem:

Still, the government’s default measure vastly underestimates the problem. The government considers people in default if they have made no payments in 360 days. A broader measure by the New York Federal Reserve—which accounts for all Americans with student loans—shows that roughly one in four borrowers are at least 90 days behind on a payment.

WSJ also noted the growing popularity of income-based repayment plans which may also be having an impact on default rates.

The Education Department said this year’s drop reflected the administration’s efforts over the past two years to enroll borrowers in so-called income-based repayment plans, which set borrowers’ payments at 10% of their discretionary income. The plans promise to forgive debt after a set period—10 years for those in nonprofit and government jobs, and 20 years for those in the private sector…Enrollment in the plans has surged, thanks in part to a continuing administration publicity campaign. As of June, the number had swelled to 1.91 million Americans holding more than $101 billion in student loans—nearly a 10th of all outstanding federal student debt. The number of borrowers and debt covered roughly has doubled in the past year.

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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