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Default Rates Rise Slightly

September 19, 2006

Cohort default rates for the federal guaranteed student loan programs rose to 5.1 percent for FY2004, up from an all-time low of 4.5 percent in the preceding year. The Department of Education (ED) recently released the cohort default data for the Federal Family Education Loan (FFEL) and the Federal Direct Loan program. Institutions should have received notices electronically on September 11 with their respective rates.

The highest rate (8.6 percent) was found in the proprietary sector and the lowest (1.5 percent) at 434 foreign institutions that participate in the FFEL program. The rate for public community colleges was 8.1 percent, while public and independent four-year colleges and universities were at 3.5 and 2.8 percent respectively.

Default rates have steadily declined over the last 14 years, after topping out at more than 22 percent in 1990. A concerted effort by all parties, from ED and guarantee agencies to lenders and institutions, is credited with reducing defaults. More than 1,100 institutions have been subject to sanctions over the years for having default rates greater than 25 percent for three years. In three of the last four years, including FY2004, no institutions faced penalties for excessive default rates.

Loans make up the lion's share of federal student aid:  26 million borrowers have $391 billion in loans outstanding. The cohort default rate only measures defaults at the beginning of the payback period. The cohort default rate is the percentage of a school’s borrowers who enter repayment on certain FFEL and Direct Loan program loans during a particular federal fiscal year and default or meet other specified conditions prior to the end of the next fiscal year.