Student Loan Default Rate Rises

Credit.com

The national student loan default rate is on the rise, with students at for-profit colleges defaulting much more frequently than those at public or private schools, according to the Department of Education.

Of borrowers who entered repayment in fiscal 2010, 14.7% defaulted within three years, up from 13.4% who entered repayment in fiscal 2009. This calculation is the three-year national “cohort default rate,” and it may affect a school’s eligibility for federal financial aid programs.

The two-year national cohort default rate has steadily risen for the past several years. Of nearly 4.74 million borrowers who entered repayment between Oct. 1, 2010, and Sept. 30, 2011 (fiscal 2011), 475,538 had defaulted on their loans by Sept. 30, 2012. That’s a 10% two-year default rate, up from 9.1% in fiscal 2010.

Starting next year, the Department of Education will sanction schools based on the three-year national cohort default rate, and if the two-year rate is any indication, the 2011 rate is likely to surpass 2010′s 14.7%.

More Borrowers Can’t Pay

The rate is based on the number of borrowers who default, not individual loans. A borrower is included in the calculation if he or she has federal Stafford loans or direct Stafford/Ford loans (subsidized or unsubsidized). Other types of student loans whether current or in default, are not factored into the calculation.

While only 13% of students attend for-profit colleges, 46% of borrowers who defaulted from 2010 to 2012 were enrolled at such institutions.

Of 1.27 billion borrowers from such colleges who began repaying their loans in fiscal 2010, 21.8% defaulted within three years. In contrast, 8.2% of students from private nonprofit schools defaulted, and 13% of borrowers from public schools defaulted in the same time frame.

While that data could lead to an analysis of higher education and how prepared students are to handle debt, it’s important to note that the overall default rate has climbed in the past decade.

For loans entering repayment in 2005, 4.6% defaulted within two years, and the rate has only gone up since. The lowest two-year default rate since 1987 was 4.5% of loans in fiscal 2003, as reported recently by the Department of Education. The highest two-year default rate was 22.4% of loans that entered repayment in 1990.

Managing Education Debt

When borrowing for education, it’s important to take out manageable loans. That means projecting future earnings based on area of study and graduating with a debt load of no more than the expected first-year salary.

Leaving school with overwhelming debt often leads to late payments or default (nine months of nonpayment), and those can wreck a consumer’s credit score. And the financial trouble can spread: Credit scores affect people’s ability to access other forms of credit and the lowest interest rates.

To maintain good financial standing, borrowers should make timely payments and work to reduce debt. It’s also important to keep track of that debt by accessing credit history through a free credit report (one is available every year from each of the three major credit reporting agencies) and your credit scores, which you can obtain free of charge from a tool like Credit.com’s Credit Report Card, in order to spot any errors or habits that may be dragging down a credit score.


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