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Student Loan-Default Problem Even Worse Than It Seems

From the U.S. Department of Education:

“The U.S. Department of Education today released the official FY 2009 national student loan cohort default rate, which has risen to 8.8 percent, up from 7.0 percent in FY 2008. The cohort default rates increased for all sectors: from 6.0 percent to 7.2 percent for Postspublic institutions, from 4.0 percent to 4.6 percent for private institutions, and from 11.6 percent to 15 percent at for-profit schools. The rates announced today represent a snapshot in time, with the FY 2009 cohort consisting of borrowers whose first loan repayments came due between Oct. 1, 2008, and Sept. 30, 2009, and who defaulted before Sept. 30, 2010.”

Loan default rates are up significantly, particularly among students attending for-profit colleges, and that’s bad. But note that this is only the official “two-year” default rate—students who default after more than two years aren’t counted in the rates, and in fact many students default after two years. And note also that the “two-year” window is, practically speaking, quite a bit shorter than that. For a student who finishes college in the Spring, the first payment is likely to come late in the “whose first loan repayments came due between Oct. 1, 2008, and Sept. 30, 2009″ window. That means that for many students the “two-year” rate is actually closer to a one-year rate, since the hard deadline is Sept. 30, 2010. And given that people can go into forebearance and deferral on their loans, and that students don’t enter default the minute they fail to make a loan payment but only after a series of consecutive missed payments, collection efforts, and so forth over many months, the number isn’t actually that far from being an immediate default rate.

The U.S. Department’s published observation that these rates are higher among for-profit colleges will, I assume, provoke a six-part series of outraged 3,000-word lectures about research methods to be written by for-profit lobbyists and published here at Brainstorm.

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