• April 19, 2014

Student-Loan Default Rates Climb as Economy Wanes

As students leave college with more debt and venture into the recession-beaten job market, it's no surprise that more are defaulting on their student loans. In the 2009 fiscal year, the default rate on student loans climbed to 8.8 percent, up from 7 percent in the previous fiscal year, according to a U.S. Department of Education report released on Monday.

More specifically, that means that out of 3.6 million student-loan borrowers whose first repayment period landed between October 1, 2008, and September 30, 2009, about 320,000 people defaulted before September 30, 2010. The climb in the 2009 cohort default rate—­­which measures what proportion of students defaulted within two years of graduation—was worst at for-profit institutions, rising to 15 percent from 11.6 percent in 2008.

At public institutions, the default rate jumped to 7.2 percent, up from 6 percent the previous fiscal year, and at private universities, the rate edged up to 4.6 percent from 4 percent in the previous cohort. The figures for each higher-education sector, not much changed from a preliminary estimate issued in May, represent a faster climb in default rates compared with the jump from 2007 to 2008.

At a news conference, James R. Kvaal, deputy under secretary of education, said two trends were causing default rates to rise. First, the economic outlook has continued to dim for college graduates. There's a strong correlation between student-loan default rates and unemployment rates, as well as credit-delinquency rates, Mr. Kvaal said. And second, the growth in for-profit colleges, which have a disproportionately high student-loan default rate, has pushed up the overall number.

In an interview, Mark Kantrowitz, publisher of FinAid.org, a Web site with information on student aid, said he did not necessarily agree with the Department of Education that for-profit colleges were causing rates to rise all by themselves. Rather, he said, the for-profit institutions enroll more lower-income students, who graduate less often than other students do. Students who fail to graduate are three times as likely to default on their student loans, Mr. Kantrowitz said.

"If you don't have a job, you can't pay back your loans," he said. "If you don't graduate, you can't get a job good enough to pay back your loans."

In 2011, five institutions—four proprietary and one private—will lose eligibility for one or more federal student-aid programs because they maintained default rates of 25 percent or higher for at least three years, or 40 percent in the latest year. Five institutions were also penalized last year. Mr. Kvaal said hundreds of colleges lost eligibility in the 1990s, when default rates were significantly higher.

The Chronicle will have a more in-depth look at the new student-loan default rates later, along with data from the department.

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