College loan default rate hits 12-year high

Posted on: September 12th, 2011 by Mikhail Zinshteyn No Comments

A metric for gauging the number of college debt holders defaulting on their loans published today by the U.S. Department of Education shows borrowers who went into repayment between 2007 and 2009 defaulted at a rate of 8.8 percent — a 12-year high.

The two-year cohort default rate, which measures the number of borrowers with federally-backed college loans who are in default, rose from 7 percent last year. In a meeting with journalists, Deputy Undersecretary of Education James Kvall said the rise in the number of for-profit institutions whose students qualify for federally-backed loans and the tepid jobs market are two major trends that explain the jump in the default rate.

For-profit colleges like Strayer, DeVry and University of Phoenix have been the subject of recent investigations over claims they mislead students on career opportunities and rely too heavily on federal subsidies. Unlike traditional non-profit institutions, for-profit, or proprietary, schools do not manage endowments nor do they receive large tax-deductible gifts from wealthy donors.

The Department of Education recently placed new guidelines for-profit schools must follow, like meeting (PDF) gainful employment rules, or provisions that penalize schools when too many of its graduates fall behind on loan payments. Schools can lose eligibility to receive federally-backed grants and loans for its students if their cohort default rate is over 40 percent one year or exceeds 25 percent for three years.

This year, the cohort default rate for non-profit public and private schools sat at 7.2 and 4.6 percent, respectively, as for-profit colleges posted a jump from last year of 11.6 percent to 15 percent.

The figures include repayment information on 3.6 million borrowers from 5,900 schools; 360,000 borrowers have slipped into default, defined by an inability to make a payment for nine months. Of those, 150,000 borrowers owed lenders for loans taken out to attend a for-profit college. A state-by-state breakdown can be found here. Arizona, which leads all states with a cohort default rate of over 16 percent, is home to the University of Phoenix, the country’s largest for-profit university. Kvall said the state’s default rate is inflated since out-of-state students who take University of Phoenix courses on-line are nonetheless counted as Arizona-based borrowers.

Dan Madzelan, a senior director within the office of Post Secondary Education, told The American Independent recourse is available to borrowers who have defaulted. The loan rehabilitation process allows individuals to make nine to ten on-time monthly payments on an agreed amount with the lender to avoid collections and a significant ding to their credit rating.

Numerous safeguards and mechanisms for managing costly loans have been implemented in the past year. The Income Based Repayment program limits the amount of money a borrower pays for loans to 15 percent of discretionary income; the Obama administration seeks to lower that debt responsibility to 10 percent. Participants are eligible based on their income and the size of their loan, and the terms are generous. For example, a borrower with a $65,000 income but with loans exceeding $100,000 can qualify to reduce loan payments to under $600.

Federal spending on college grants and subsidies increased as well under the current administration; The American Opportunity Tax Credit provides credits of $2,500 per student annually, while the cash award for the Pell Grant increased by several hundred dollars.

The Department of Education will begin measuring default rates using a three-year cohort default rate next year. Kvall explained the three-year picture offers a more comprehensive and realistic snapshot of borrowers in default.

Ironically, in 1999, the last time default rates were this high, the Department of Education released a press statement that read, in part: “The national student loan default rate fell to 8.8 percent for fiscal year 1997, the lowest point since the federal government started calculating the rate with FY87 data.”

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