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ED Announces Student Loan Default Rates

October 1, 2012

The U.S. Department of Education announced that the two-year national cohort default rose from 8.8 percent in FY09 to 9.1 percent in FY10. Students are declared to be in default on their federal student loans (loans provided under the Federal Family Education Loan or Federal Direct Loan programs) if they fail to make a payment for 270 consecutive days or more during their repayment period. The FY10 two-year cohort default rate information, released by the Department of Education's Office of Federal Student Financial Aid (SFA), is based on the borrowers who entered repayment on these loans from October 1, 2009, to September 30, 2010, and defaulted on or before September 30, 2011. Of the 4.1 million borrowers who entered repayment in the FY10 timespan, nearly 375,000 defaulted. Default rates have potentially substantial consequences for postsecondary institutions.

Default Rates Rise Due to Poor U.S. Economy

The average rate of default has climbed steadily since the onset of the Great Recession, reflecting lower job prospects for new college graduates, as well as other adverse economic conditions. In FY05, the average rate of default was just 4.6 percent, and during the period of fiscal years 2000 to 2006, the rate remained below 6 percent. During the height of the recession, in FY07, the average rate jumped to 6.7 percent, and has risen every year since then. Despite these recent increases, the overall default rate remains well below the record high of 22.4 percent reached in FY92.

Rates Vary by Institution Type

While the overall rate of default rate is 9.1 percent, the rates vary greatly by type of institution. Private nonprofit four-year colleges and universities had the lowest average default rate in FY10 (5.1 percent), followed by public four-year institutions (6 percent). Private for-profit (proprietary) institutions had the highest average rate (12.9 percent), but the average default rate for these institutions actually fell from 15 percent in FY09. Other sectors saw increases in defaults-four-year private non-profit institutions, for example, reported a default rate of 4.5 percent in FY09.

New Three-Year Default Rates

This year, for the first time, OSFA has released official FY09 three-year default rate (trial rates were provided last year). This new rate, mandated by the Higher Education Opportunity Act (HEOA), is based on borrowers who entered repayment during FY09 (October 1, 2008, to September 30, 2009) and defaulted on or before September 30, 2011. Of the 3.6 million borrowers in this cohort, 489,000 (13.4 percent) entered default within the timespan. Data by institution type show that four-year private nonprofit institutions had the lowest three-year percentage (7.3 percent), followed closely by four-year public schools (7.9 percent). Proprietary institutions had the highest overall rate (22.7 percent).

Under the HEOA, institutions with three-year cohort default rates of 30 percent or higher for three consecutive years, or more than 40 percent in any year, will lose eligibility for Title IV aid. These new sanctions will not be imposed until 2014, when three years of the new rates are available. According to ED, 218 institutions had FY09 three-year rates at or above 30 percent, including 35 public institutions and 23 nonprofits. These were overwhelmingly nondegree or two-year institutions. Institutions have an opportunity to appeal their cohort default rates under ED regulations, so the just released rates are not yet final.
More information about the cohort default rates, including rates for each individual institution that participates in the federal student loan program, is available from the SFA Web site.

Contact

Ken Redd
Director, Research and Policy Analysis
202.861.2527
E-mail

Anne Gross
Vice President, Regulatory Affairs
202.861.2544
E-mail


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