College Default Rate Rises to 8.8 percent

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The overall two-year default rates of students with federal student loans rose to 8.8 percent last year, from 7 percent a year earlier defaults among students who attended for-profit schools jumped by nearly 30 percent, from 11.6 percent to 15 percent, according to U.S. Education Department figures released today.

Department officials said they believed the rise was generally associated with continued high unemployment rates. “Borrowers are struggling in the economy,” said James Kvaal, deputy under secretary of education, during a conference call with reporters.  

The highest default rates were among four-year for-profit schools, officials said. The default rate for students of public colleges was 7.2 percent, up from 6 percent, and the default rate for private nonprofit schools was 4.6 percent, up from 4 percent.

In contrast to today’s rates, officials said default rates were 22.4 percent in 1990, and were at 17.6 percent in 1987 when results were first tallied. The high default rates of the 1990s resulted in hundreds of schools, many of them small for-profits, being shut out of federal aid programs.

Kvaal pointed out that for-profit schools contributed nearly half of the 320,000 students who entered repayment in fiscal 2009 and were already in default.

Although the default rates are for federal direct or federally guaranteed loans, high default rates can determine a school’s eligibility for participation in the Pell Grant program. The controversial so-called “gainful employment” regulations would require schools to have defaults of more than 35 percent for three consecutive years before their federal eligibility would be affected.

Results released today were the official version of draft results of the default rates released in April. The default rates are for students who entered repayment of their loans during fiscal year 2009 and were at least 270 days in arrears by the end of fiscal 2010 (Sept. 30, 2010).

As a result of their high default rates, five schools are to lose their eligibility to participate in federal loan programs. They are Tidewater Technical, Norfolk, Va.; Trend Barber College, Houston, Texas; Missouri School of Barbering & Hairstyling, St. Louis, Mo.; and Sebring Career School, Houston, Texas. All proprietary schools. The fifth school is a private school: Human Resource Development & Employment - Stanley Technical Institute, Clarksburg, W.Va.   

Kvaal said officials already are seeing changes in the admission practices, loan counseling and trial enrollment periods at some for-profit schools which have had high default rates. These changes come as the Department is moving to using a three-year default rate as its standard for determining federal education fund eligibility. In a test run of borrowers who entered repayment during fiscal 2007, the three-year default rates were as much as twice the two-year default rates.

For example, online students enrolled at Kaplan University had a two-year default rate of 17.17 percent for students entering repayment in 2009, but its three-year cohort rate for students entering repayment in 2008 was 27.79 percent. Strayer University had a 2009 two-year default rate of 6.71 percent and a 2008 three-year default rate of 12.76 percent. The University of Phoenix, the nation’s largest university, had a 12.90 percent default rate for its 2009 two-year rate, but a 21.17 percent rate for its 2008 three-year group.

Kvaal said that the three-year default rates should be a better indicator of how students are repaying their loans because there is some indication that schools are “managing” their former student’s repayment by employing various legal delaying tactics and repayment methods.

He also noted that the rise in default rates was expected because of the continuing slow economy, pointing out that loan default rates usually lag behind other economic measures.

Despite the dire connotation of the high default rates, officials conceded that most of the money eventually is collected, often at a very high price to the student. A student in default cannot obtain any additional federal student aid funds, may be excluded from obtaining a federal job, could have any income tax refund taken by the department, could face wage garnishment and would probably have a private collection agency seeking the repayment.

“They do a pretty good job of getting the money,” Kvaal said in reference to the various collection procedures.

For information about default rates for various schools, click here.