The student-loan industry, which learned late Friday that its loan overhaul plan would save the government $13-billion less than legislation to end bank-based lending, got another bit of bad news on Monday, when the Education Department released its annual cohort default rates.
The data, which reflects the percentage of borrowers who entered repayment in the 2007 fiscal year and defaulted within the next two years, shows that the default rate was 2.4 percentage points higher for borrowers in the bank-based program (7.2 percent) than for those in the competing direct-loan program (4.8 percent). The discrepancy was even larger than the department had forecast back in March, when it released preliminary data that put the rates at 7.3 and 5.3 percent.
Both programs had higher cohort default rates than in 2006, when 5.3 and 4.7 percent of students with bank-based and direct loans defaulted, respectively. In a news release, Secretary of Education Arne Duncan blamed the rising rates on the economic downturn, and said the department was "reaching out" to current and prospective borrowers to educate them about their loan repayment options. Borrowers facing difficulty repaying their loans may qualify for a deferment, a forbearance, or an income-based repayment plan.
The department didn't attempt to explain the discrepancy in defaults between the programs, but it did note that there are more for-profit colleges in the bank-based program than in direct lending. As usual, the 2007 rate was higher for borrowers who attended for-profit institutions (11 percent) than for borrowers who attended public colleges (5.9 percent) or private colleges (3.7 percent). Borrowers who attended for-profit institutions may be more likely to be working adults who have lost their jobs, said Brett E. Lief, president of the National Council of Higher Education Loan Programs.
"It's disappointing and it reflects what is probably the first of a couple years of increases in default rates because of the economy," he said.
The release of the data comes just three days before the U.S. House of Representatives is scheduled to vote on a Democratic bill to shift all loans to the direct-loan system. Supporters of the legislation are certain to draw attention to the default-rate data during debate over the measure.
Comments
1. atana09 - September 15, 2009 at 09:42 am
Not entirely unexpected that the student loan default rate for corporate loans is higher than with the alternative federal loans. It's an open secret that these companies actually use tactics to drive troubled borrowers into default, because of the potential to collect federal remediation money, and then collecting greatly enhanced fees (at times almost doubling or tripling the amounts owed) from the troubled student borrowers.
As Senator Kennedy noted in his famous 2007 letter there were (and still are) deep concerns about the ethical propriety of the collection tactics of these companies. And these companies have very powerful and very profitable collections divisions, who have been given unparalleled powers (often leading to abuse) via sweetheart regulations propagated by their shills in the USDOE or Congress.
Now given that they have the ability to exert these strong arm tactics, and have the contradictory condition of benefiting from defaults-it is indicative of something is incredibly afoul when even with all these advantages the default rate is demonstrably higher for these corporate loans. To paraphrase Dr. Warren, even with 'powers the mob would envy' they cannot get things to balance out. But of course the intention is to rig the game against troubled borrowers...
Problem is there is that massive 580 billion dollar student loan credit bubble, created by these companies grossly inflating already large student loan debts. And its a bubble which cannot be sustained. Given the economies dive into depression default rates will inevitably climb and what then will the corporations or the government do?
In a generation we have created a student lending system which is an abhorrent monster. And before it gets put down, there is more damage to the common good that it will yet do.
2. 11132507 - September 15, 2009 at 04:10 pm
I really hope that Congress looks this data over carefully before creating some variation on Direct Lending in which current players in the FFEL program are given prominent, taxpayer funded roles in default prevention. Despite their marching orders to do so, guarantee agencies haven't demonstrated any outstanding track record in this area, and given colleges' statutory responsibilities regarding borrower counseling, guarantee agencies really seem like 5th wheels, even in the area in which they claim to set the standards.
3. atana09 - September 15, 2009 at 05:09 pm
If the current players in the FFEL program are given a presence it will be very indicative that congress and the USDOE have no genuine intention for reform. And their presence will eventually corrode the cost savings and other reforms possible with the change to direct lending. If congress gives these corporations a role, it will be more indicative of the effects of lobby pressure and deep pockets by the educational lenders than congressional interest in serious reform.
Essentially allowing these companies any presence in governmental sponsored student lending especially under the auspices of reform- is like covering the head of a misbehaving rattlesnake with a paper bag, it will still bite someone.