Tuesday, May 17, 2011

Student loan default rates increase dramatically after first two years of payment period

The Chronicle of Education on student loan default rates:
 [T]he government's official "cohort-default rate," which measures the percentage of borrowers who default in the first two years of repayment and is used to penalize colleges with high rates, downplays the long-term cost of defaults, capturing only a sliver of the loans that eventually lapse.
...default rates continue to climb years after borrowers have left college, particularly among students who attended two-year and for-profit colleges.
This comes from an article almost a year old, but the issue of accurately measuring student loan default rates  is still timely.  In addition to the general public interest in knowing this information, new DOE rules effective next year will make colleges ineligible for federal student aid if their default rate is 30 percent or greater for three consecutive years (currently 25 percent or greater for two years) or 40 percent in a single year.  There have been indications that colleges are "managing" their default rates to mask problems.

Extending the time frame from two to three years caused default rates to increase significantly.

Increases in Cohort Default Rates (2-year vs 3-year window)
Year
2-Year Rate
3-Year Rate
Increase in Default Rates
FY 2004
5.1%
8.6%
69%
FY 2005
4.6%
8.4%
83%
FY 2006
5.2%
9.2%
78%
FY 2007
6.7%
11.8%
76%

The default rate almost doubles at the 15-year period.

Increase in Cohort Default Rates (2-year vs 15-year window)
FY1995 2-Year Rate
FY1995 15-Year Rate
Increase in Default Rates
10.4%
19.5%
88%


Default rates for different types of schools:

15-Year Lifetime Default Rates for FY1995
College Type
15-Year Default Rate
Percent of Defaulted Loans
Percent of Loans in Repayment
Foreign 2-Year
20.7%
0.0%
0.0%
Foreign 4-Year
15.1%
0.1%
0.1%
Non-Profit 2-Year
29.3%
1.2%
0.8%
Non-Profit 4-Year
13.6%
21.4%
30.6%
For-Profit 2-Year
40.0%
16.8%
8.1%
For-Profit 4-Year
30.4%
9.0%
5.7%
Public 2-Year
31.3%
12.6%
7.8%
Public 4-Year
15.1%
32.4%
41.8%
Unknown 4-Year
5.0%
0.0%
0.0%
Consolidation Loans
25.8%
6.5%
4.9%
Overall
19.5%
100.0%
100.0%

Default rate data is from FinAid.
FY = fiscal year in which loan repayment began

2 comments:

  1. The new regulations are mainly aimed at the for-profit sector, which have an abysmal default rate. Not surprising given their astoundingly high tuitions and very shaky student bodies

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  2. I think the student bodies are the bigger factor. According to FinAid:
    The primary drivers of default are interest rates, graduation rates and job placement rates.

    High unemployment has been bad for default rates, but if interest rates go up things will get worse for all groups.

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