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Student Loan Default Rate Rises Slightly

October 8, 2008

Default rates on federally guaranteed student loans rose from 4.6 percent to 5.2 percent for the fiscal year ending September 30, 2006. That increase was due, in part, to a large increase in defaults in the states affected that year by hurricanes Katrina and Rita.

Default rates are not even across types of institutions and tend to be notably higher at proprietary institutions. For 2006, for-profit institutions registered a 9.7 percent default rate, compared to 8.2 percent in 2005. In contrast, public institutions’ rate rose from 4.3 percent to 4.7 percent, and independent institutions’ rose only 1/10th of a percent to 2.5 percent. Regardless of control, four-year institutions tend to have lower default rates than those whose programs are less than four years.

The cohort default rate that has been used for more than a decade looks at a fairly short window; it calculates the number of borrowers entering repayment during a fiscal year who defaulted by the end of next fiscal year. In response to criticisms that the measure is too short-sighted, Congress dictated a change in the formula as part of its recent reauthorization of the Higher Education Act. The new default rate must take into account an additional year. . At the same time, the threshold at which institutions must take default-reduction measures or face loss of eligibility to participate in the federal loan programs will rise from 25 to 30 percent.

NACUBO Contact: Anne C. Gross