Updated statistics released by the U.S. Department of Education show that student loan defaults are rising. According to the latest figures, the default rate for government loans that entered repayment in 2008 is 13.8 percent, up 2 percent from the default rate for federal student loans that entered repayment in 2007.
The current official national student loan default percentage, which stands at 7.0 percent, measures the percentage of borrowers who default on their federal education loans within the first two years of repayment. But when the calculation is expanded to take into account defaults within the first three years of repayment, the national student loan default percentage jumps to13.8 percent.
The New College Grad: Unemployed, in Debt, and Defaulting
Under new rules implemented by the Higher Education Opportunity Act of 2008, the three-year calculation will soon be used as the standard measure of student loan default percentages. Beginning in 2014, colleges and universities whose default percentages rise above 30 percent will lose access to federal financial aid - government-funded grants and education loans - for incoming and existing students.
Current federal regulations cut off a school's eligibility for federal student aid when the school's default percentage exceeds 25 percent, but that guideline uses the more forgiving two-year default rate. Officials at the Education Department attribute the rise in student loan defaults to the soft job market and the ballooning number of recent graduates who are finding themselves unemployed and with a pressing need for debt relief.
Education Department officials also point to the growing amount of college loan debt being accumulated by students, particularly at pricier for-profit colleges and private nonprofit four-year universities. Among undergraduates who leave college with debt from school loans, the average student loan debt load is $23,186, according to FinAid.org.
Using the three-year default rate calculation, the default rate for students of private nonprofit colleges and universities is 7.6 percent, compared to a 4-percent two-year default rate. Among public university students, the three-year default rate is 10.8 percent, versus a two-year default rate of 6 percent.
The biggest jump from two-year to three-year student loan defaults is seen among students from private for-profit colleges. Using the three-year measure, the default rate among these borrowers is 25 percent, more than double the two-year default rate of 11.6 percent.
New Rules Threaten Schools' Access to Financial Aid
According to an analysis conducted by The Wall Street Journal, nearly 9 percent of higher education institutions would lose their ability to offer federal student aid if the new default rules on college loans were in full effect today. Under the current rules, only 1.6 percent of schools lost their eligibility for federal grants and college loans due to excessive student defaults.
A 2003 report from the Inspector General for the Department of Education charged that some for-profit colleges had become so concerned about the rise in student loan defaults among their former students that the schools were masking their true institutional default rates. Two high-profile cases in 2008 and 2009 charged two for-profit school with paying off delinquent student loans in order to avoid having to report the defaults, a practice that violates federal financial aid regulations.
In response to these and other barrages of accusations being fired at for-profit colleges, the Department of Education is considering other regulations that would prevent the for-profits from misrepresenting the financial health of their graduates by manipulating student loan default percentages.
In one proposed measure, termed the "gainful employment rule," the Department of Education will not only look at student loan repayment rates but also graduates' debt load from school loans as a percentage of the income these students earn after they leave school. By tying a for-profit school's eligibility for federal student aid to gainful employment following college, the Education Department is hoping to stem the spiraling levels of student loan debt at for-profit colleges, which historically have produced the highest default rates.
Student loan default rates have garnered new attention from the Education Department not only because the default rate is rising but also because the department is under Congressional pressure to produce a more cost-efficient student lending process with fewer losses from defaulted loans. The Department of Education is expected to issue the finalized gainful employment rule later this spring.
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