Even during the depths of the Great Recession, the cost of higher education continued to increase. With a depressed job market, many new college graduates had trouble finding viable employment to afford their student loan payments. As a result, the student loan default rates increased during the 2009 and 2010 fiscal years. But, the U.S. Department of Education recently reported in September 2016 that the default rates for declined year-over-year for college graduates that entered repayment status from Fiscal Year 2012 to Fiscal Year 2013.
Breaking Down The Statistics
Each September, the Department of Education releases the most recent data regarding student loan default rates. The benchmark statistic is the three-year student loan default cohort default rate that measures the repayment history for three years after each college student, from foreign and domestic schools, enters repayment status via most Federal Family Education Loans (FFEL) and William D. Ford Direct Loans program. For example, student graduates from fiscal year 2012 were monitored from October 1, 2011, to September 30, 2014, and had an average default rate of 11.8%. The 5.2 million FY 2013 college graduates, October 1, 2012, to September 30, 2015, had a lower default rate of 11.3%.
To give some perspective to the default trends, the three-year default rate peaked for Fiscal Year 2010 graduates at 14.7%. Since then, the rate has steadily declined for students attending most types of schools, according to our college debt statistics. The default rate is also broken down into different four different types of schools: public, proprietary (for-profit), private, and foreign. It includes the traditional post-secondary establishments like community colleges and 4-year universities, but, it also includes professional schools like beauty schools or business schools that also accept federal student loans as a payment. Although the default rate has declined overall, it rose slightly for private and foreign school graduates.
Default Rate for Public & For-Profit Institutions has Declined
Of the 6,155 postsecondary institutions included in the three-year default rate, 27.6% of the schools were public colleges and universities. However, public institution graduates were 51.6% of the borrowers tracked and the average default rate for this group was 11.3%. As this subset has the largest population measurement, they greatly influence the default rate each year.
Proprietary institutions, also called “for-profit” institutions, also had slightly lower default rates as they declined from 15.8% in FY 2012 to 15.0% in FY 2013, although sharply lower from the 19% default rate for FY 2011 graduates. Despite the lower default rate, they still had the highest overall rate among all four types of postsecondary institutions and the second largest group of graduates with 26% of the measured population. Possibly part of the reason that the default rate has declined is that the overall enrollment in proprietary schools slightly decreased and sanctioning institutions with excessively high default rates from accepting federal loans as payment.
Default Rate for Private & Foreign Colleges Slightly Increased
The two smallest groups of postsecondary graduates attended private and foreign colleges that both experienced slightly higher default rates. With 21% of the total student population, private school default rates increased from 6.8% to 7.0%. Foreign school graduates, with 0.2% of the population, had a year-over-year uptick from 3.3% to 3.6%. Enrollment for both of these schools have was relatively identical from 2012 to 2013.
Several Reasons Why the Default Rate has Declined
The leading reason why the overall default rate has decreased since FY 2009 is federal student loan reform measures implemented since the onset of the Great Recession. Enrollment in income-driven repayment options has soared. The various programs, Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment normally cap monthly payments at 10% of the month salary for college graduates.
To highlight the increase in these various programs among Direct Loan borrowers, there was a 48% increase from December 2014 and a 130% increase from December 2013. One reason for the increase is that prerequisites to qualify have been expanded. Government employees in select career fields also have an added incentive to enroll in income repayment plans, as their remaining loan balance is forgiven after 10 years instead of 20 years.
Another reason the default rate has decreased is because the Department of Education will impose sanctions on specific schools with default rates of at least 30% for three consecutive years or 40% for the most recent year. After the fiscal year 2013 default rates were released, nine for-profit schools and one private non-profit school were imposed sanctions due to excessively high default rates. Once sanctions are imposed, each school must create a task force to address the issue so they can continue receiving federal aid.
Future Plans to Further Reduce the Default Rate
Student loan reform and the cost of higher education has been an issue for several election cycles and the Department of Education has been taking an active role to prevent the default rate from spiking again to the FY 2010 high of 14.7%. Several actions taken include moving the application window forward to October 1st, allowing students to receive the financial aid packages sooner and able to make a more educated financial decision when choosing how to finance their education and for high school seniors to choose the most economical option.
As the cost of college is still trending upward, the Department of Education is also trying to educate current college students and recent graduates more on the most abundant availability of income-driven repayment plans and the increased allotment of Pell Grants and tax credits that also reduce the cost of higher education. The Department also want to implement more interactive and comprehensive loan counseling, in addition to the current requirements of one-time entrance and exit counseling.
Through a combination of capping monthly student loan payments and increasing financial literacy, the strategy is college graduates will have more tools available to have a better understanding of how student loans work and being charged a manageable payment that also allows them to pay their other monthly bills and save for the future as well. It will be interesting to see how these safeguards will influence the default rates of future graduation classes.
Author: Jeff Gitlen
Join the LendEDU Newsletter
News, insights, & tips once a weekThanks for submittingPlease Enter a valid email
Student Loan Guides
Student Loan Reviews