For the first time this year
data was expanded to track the three year rate. Of those starting repayment during 2009 almost half a million borrowers (489,040) defaulted within three years. This represents 13.4% of borrowers. The two year default rate is now more than double the historic low rate of 4.5% in 2003. For the last six years default rates have been rising.
If colleges have a two year default rate of over 25% or higher, or above 40% in a single year, they cannot receive federal student aid. One institution in Puerto Rico and one in Norfolk Virginia failed to meet the standards and will not be eligible for student aid next year unless they appeal and win.
For-profit schools have the highest default rates. Politicians and financial advisers had warned that for-profit schools often lured unqualified students and did not inform students properly about their debt obligations. Reforms to regulations may have helped as the rate of default in for-profit institutions has dropped from 15% to 12.9%. However, Debbie Cochrane, the research director at the Institute for College Access and Success, said that the observed decrease in default rates among the for-profit colleges has more to do with default-management tactics than students actually repaying their loans.Some colleges defer loan payments so that they do not appear as defaults!
The Department of Education is now going to change its standards to look only at three year rates. This new rate shows that half the borrowers in default attend for-profit colleges even though they represent only 28% of the total borrowing group and just 13% of enrolled students. The three year default rate for for-profit schools was a whopping 22.7%.
Senator Tom Harkin
of Iowa said:
"This default data raises serious questions about the quality and value of the education students receive from these schools."
The new three year rates would disqualify a school from receiving student aid if the default rate was above 30% over three years. If that standard had been applied this year 218 institutions would be above the 30% rate. Thirty seven schools had rates above 40%. Of those 218 schools, 160 are for-profit, 35 public, and 23 private.
More than one in ten students default on their loans. The total outstanding loans
comes to about $1 trillion. As governments cut back on funding to universities and colleges, tuition fees rise sharply causing even more financing problems for students. Pauline Abernathy,
of the Institute for College Access and Success said:
“Default rates are the tip of the iceberg of borrower distress.”
Congress is looking at deceptive practices used by some financial aid offices that make government loans look as if they are grants. Politicians are calling for more disclosure. Obama has helped to some degree through an executive order that lets students make payments tied to their income. This will.make defaults less likely. Republican presidential contender Mitt Romney claims that this move just encourages students to take on more debt. Romney recommends cutting regulations and making colleges more efficient. This would no doubt mean few less well off students would have access to higher education.
U.S. Secretary of Education, Arne Duncan
in a statement said:
“We continue to be concerned about default rates and want to ensure that all borrowers have the tools to manage their debt. In addition to helping borrowers, we will also hold schools accountable for ensuring their students are not saddled with unmanageable student loan debt.”
The new data shows that for many students their economic prospects may be damaged as they default on debt and lower their credit ratings. In countries such as Finland higher education is completely free but recommending free tuition as a solution to the problem in the U.S., the most productive country in the world, would be regarded as Utopian dreaming.