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Federal Student Loan Default Rate Rises to 10 Percent

October 2, 2013

One in 10 federal student loan borrowers who entered repayment in FY 2011 had defaulted on their loans by the end of FY 2012, according to the U.S. Department of Education. Generally, a default on a federal student loan occurs when a borrower fails to make payments for 270 consecutive days or more and does not file for a loan deferment or forbearance.

Each year since FY 1987, the Department's Federal Student Aid (FSA) division has reported a national average two-year cohort default rate, which is based on the percentage of borrowers who enter repayment in a fiscal year and default by the end of the next fiscal year. For FY11, this default rate is based on roughly 4.7 million borrowers who entered repayment sometime between October 1, 2010, and September 30, 2011. More than 475,000 of these borrowers defaulted on their loan payments on or before September 30, 2012.

The two-year cohort default rate has risen each year since 2005, when it was 4.6 percent. High joblessness among recent college graduates partially explains the recent increases in defaulting. From calendar year 2005 to 2012, the unemployment rate among college graduates age 21 to 24 rose from about 4.5 percent to 9.4 percent, according to the Education Policy Institute.

Beginning in FY 2012, FSA also began to report a three-year cohort default rate. Currently, three-year default rates are available for FY 2009 and 2010. In this short span, the three-year rate has increased from 13.4 percent to 14.7 percent. The FY 2010 three-year cohort rate is based on 4.1 million borrowers who entered repayment sometime between October 1, 2009, and September 30, 2010. About 6000,000 of these borrowers defaulted on their loans on or before September 30, 2012. Beginning in FY 2013, FSA will report only the three-year cohort default rate.

Trends by Type of Institution

Default rates vary greatly by borrowers' institutional type. In FY 2011 the average two-year cohort default rate by institution type ranged from 5.1 percent at four-year private non-profit colleges and universities to 14.1 percent at less-than-two-year private for-profit (proprietary) schools.

In addition, proprietary institutions account for a large share of the recent increase in two-year rates. From FY 2010 to FY 2011, the average two-year cohort default rate for less-than-two-year private for-profit schools jumped from 11.8 percent to 14.1 percent, while the rate for four-year private non-profit institutions remained stable at 5.2 percent. During that same period, the rate for four-year public colleges and universities increased from 6 percent to 6.8 percent.

At four-year private non-profit colleges and universities, the average three-year cohort default rate grew from 7.3 percent for those who entered repayment in FY 2009 to 8 percent in FY 2010. Less-than-two-year proprietary school rates declined slightly-from 21.5 percent to 20.9 percent.

Institutions' Loan Eligibility At Risk

Beginning in FY13, schools may lose eligibility to participate in the federal student loan and some other financial aid programs if their three-year cohort default rate is 30 percent or higher for three consecutive years, or if they have a default rate of 40 percent or more for any one year.

A list of all institutions' three-year default rates is posted on FSA's Web site. Analysis of this list shows 215 institutions have default rates that might lead to their ineligibility to participate in the federal student aid programs. Many of these are either proprietary schools or colleges and universities with fewer than 500 borrowers who entered repayment during the FY 2009 and FY 2010 cohorts.

Contact

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


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