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Federal Student Loan Default Rates Highest Since 1997

September 17, 2010

The 2008 cohort default rate on federal student loans rose to 7.0 percent, up from 6.7 percent in 2007 and the highest rate since 1997, according to recently released data from the Department of Education. Of the 3.4 million loans that entered repayment during fiscal year 2008, about 239,000 entered default status on or before September 30, 2009.

Defaults on federal student loans occur when borrowers do not make payments for nine months or more and do not make arrangements for loan deferment, forgiveness, or forbearance. The cohort default rate for fiscal 2008, the most recent year of available data, is based on borrowers who entered repayment between October 1, 2007, and September 30, 2008, and then defaulted on or before September 30, 2009. ED publishes default rates approximately two years after the fiscal year that students enter repayment. The 2008 data are based on records collected from nearly 5,900 postsecondary institutions.

Due in part to the recent economic recession, student loan defaults have been on the rise. In 2005, the national default rate was 4.6 percent. The current 7 percent rate is the highest since the 8.8 percent figure reported in 1997, but it is still far below the record high of 22.4 percent in 1990.

Differences by Sector and Program

Proprietary schools have historically had the highest default rates, and the rates for borrowers at these institutions have had the sharpest recent increase in recent times. The share of these borrowers in default rose from 9.7 percent in 2006 to 11.6 percent in 2008. In the same time span, the rate for borrowers who attended four-year public colleges and universities increased more modestly (3.4 percent to 4.4 percent). At four-year private nonprofit institutions, the default rate increased from 2.4 percent to 3.8 percent. The Department has posted a table showing default rates by institutional sector on its website.

Default rates for the Federal Direct Loan program continue to be significantly lower than rates for the now discontinued bank-based Federal Family Education Loan (FFEL) program. For 2008, the overall cohort default rate for Direct Loans dropped slightly from the previous year from 4.7 to 4.6 percent, while the rate for the FFEL program rose from 7.2 to7.7 percent. The difference was most pronounced for public institutions, with a rate of 4 percent for Direct Loans compared to 7 percent for FFEL. In 2008, a much greater proportion of institutions participated in the FFEL program (5,147) than the Direct Loan program (1,456), however, leaving open the question of whether default rates will drop overall when all federal loans are made through the Direct Loan program.

Upcoming Changes

Cohort default rates for all institutions will go up in the next few years as ED implements a change to the definition mandated by Congress in the Higher Education Opportunity Act of 2008. Beginning in 2012, loans that go into default within three years of entering repayment, rather than the current two years, will be counted. Preliminary data released in December 2009 showed rates rising 75 percent on average, again with higher increases in the proprietary sector.


Ken Redd
Director, Research and Policy Analysis