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Study Shows Many Student Loan Borrowers Have Difficulty Repaying

March 23, 2011

Every year, the U.S. Department of Education is required to report the percentage of federal borrowers who enter default. The most recent report found that the national default rate grew from 4.6 percent in fiscal year 2005 to 7 percent in FY08, the most recent year of available data. Defaults occur when borrowers do not make any payments on their loans for 9 months or more.

The annual default rates, however, include borrowers in their first two years of repayment only (that is, the 2008 rates are based on students who entered repayment in 2007 and then defaulted in 2007 or 2008). Very little is known about borrowers who default after the first two years in repayment. And until now there was no national data on the experiences of borrowers who become delinquent on their loan repayment obligations but do not actually default. (Federal student loan borrowers are considered to be in delinquency when they fail to make monthly payments on their loans within 60 days of the due date.)

A new report from the Institute for Higher Education Policy (IHEP) suggests that delinquency in the loan programs could be a major concern for students and higher education institutions. The IHEP report, “Delinquency: The Untold Story of Student Loan Borrowing” is based on data provided by five of the nation’s largest federal student loan guaranty agencies. The IHEP dataset includes more than 8.7 million student borrowers, with nearly 27.5 million loans, in loans who entered repayment between 2004 and 2009. Collectively, these borrowers received $148 billion in federal student loans.

The focus of the study is on the roughly 1.8 million borrowers who entered repayment in 2005. Approximately 26 percent of these borrowers were delinquent on their repayment obligations at least once during the five-year period of available loan repayment history data but did not default, while 15 percent experienced a delinquency that led to a default. This means that at least 41 percent of the borrowers who entered repayment in 2005 had experienced at least one substantial difficulty in repaying their loans during the five-year repayment period under study. In contrast, only 37 percent of borrowers were repaying their loans without any noticeable difficulties, while 23 percent received a loan deferment or forbearance that temporarily delayed their loan repayment obligations. (Under federal law, borrowers who experience economic hardships or other difficulties may have their loan repayment obligations delayed temporarily. Borrowers who return to any accredited college or university may have their loan repayments deferred until they fall below half-time attendance status.)

Delinquency status varies greatly by students’ degree/certificate completion status and institutional sector. Overall, 42 percent of the undergraduate borrowers who entered repayment in 2005 had graduated with a degree, certificate, or other program completion credential. Of these, 38 percent experienced at least one delinquency or defaulted. Conversely, 59 percent of undergraduate borrowers who left without a credential experienced a delinquency or defaulted. Additionally, one-third or fewer of the borrowers who last attended a four-year public or private nonprofit college or university experienced a delinquency or defaulted on their loans, versus more than half of those at two-year public (community) colleges and private for-profit (proprietary) schools.

The report suggests that one reason for the higher incidence of default at some institutional types is the borrowers’ apparent lack of knowledge about loan deferment or forbearance provisions. According to IHEP’s analysis, only 5 percent of borrowers from two-year proprietary institutions used a deferment or forbearance, compared with 16 percent at community colleges. Borrowers who last attended community colleges and experienced delinquencies were more likely than their counterparts from for-profit institutions to have used deferments and forbearances.

The IHEP analysis suggests that loan default rates are substantially higher than the data suggested by the Department of Education, and rates may be even higher if some portion of the delinquent borrowers experience difficulties in the future. In addition, IHEP cautions that their data analysis includes borrowers who entered repayment prior to the 2008-2009 economic recession. The loan repayment experiences of these students have yet to be analyzed.

Contact

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