More Student Loans Default Between Years Two and Three

More college graduates are defaulting on their student loans, according to a report issued Sept. 28 by the U.S. Department of Education. In its first three-year report of federal student loan cohort default rates, the department found 13.4 percent of graduates defaulted—missed at least nine payments—since 2009. The report was the first official three-year study released; prior reports focused on two-year default rates. The national two-year default rate increased from 8.8 percent last year to 9.1 percent, or about 375,000 borrowers—the highest rate in more than 10 years.

“We continue to be concerned about default rates and want to ensure that all borrowers have the tools to manage their debt,” said U.S. Secretary of Education Arne Duncan. “In addition to helping borrowers, we will also hold schools accountable for ensuring their students are not saddled with unmanageable student loan debt.”

The transition from a two-year to a three-year study was undertaken because many borrowers defer loans during portions of the first two years after graduation, which skews the repayment figures. Congress deemed a three-year report would present a more accurate portrayal of the number of borrowers who fail to make required payments toward their loans. The results of the new study indicate default rates increased from borrowers second to third year by more than 53 percent. In fact, an additional 169,000 borrowers defaulted during their third year of repayment.

“At schools where lots of students borrow, cohort default rates serve as a critical measure of risk for both students and taxpayers,” said Debbie Cochrane, research director at The Institute for College Access & Success. “By tracking defaults for a longer period of time, the new three-year rates capture more of what’s really happening to borrowers. Still, while schools are held accountable for defaults only in the first two or three years, the consequences for borrowers are severe no matter when they default.”

The study also found a vast difference between rates of default from borrowers who attended public and private not-for-profit schools and those who attended for-profit institutions. The two-year cohort default rate at public institutions increased from 7.2 percent last year to 8.3 percent, and at private non-profit schools from 4.6 percent to 5.2 percent. Rates at for-profit schools, on the other hand, improved but remained much higher, dropping from 15 percent to 12.9 percent.

Similar differences exist in three–year rates. Public institutions saw their default rates increase from 7.2 percent in two years to 11 percent in three years from separation. At private not-for-profit institutions default rates jumped from 4.6 percent in two years to 7.5 percent in three years; and for-profit schools rates increased from 15 percent to 22.7 percent.

According to TICAS, the uneven three-year default rates between non-profit and for-profit colleges is troubling. Almost half of defaulting borrowers attended for-profit schools, which enroll only 13 percent. Experts say more must be done to ensure borrowers are aware of various repayment options, including income-based repayment, which has been available since 2009, and bases payment size completely upon the borrower’s income. Under IBR, any debt left unpaid after 25 years is forgiven. Defaulted loans are ineligible for IBR, however.

“Far more must be done to help struggling borrowers find out about and enroll in IBR, which prevents default by keeping payments manageable – as little as $0 if your income is very low,” said TICAS president Lauren Asher. “Especially in this economy, IBR could be helping millions more people make regular, affordable payments instead of falling so deep in the hole that they can’t climb out.”

Consequences of defaulting on students loans are steep for both borrowers and institutions. Borrowers who default can face wage garnishments, smaller Social Security checks, captured income tax refunds and destroyed credit reports. They can also be ineligible for future student loans and grants. Schools with too high a default rate among former students can lose the ability to participate in federal student loan and grant programs.