Student-loan defaults show stabilization

Associated Press

After a sharp jump during the worst of the recession, new figures show the number of students defaulting on federal loans seems to be stabilizing. Students at for-profit colleges continue to have the highest default rates, but the sector saw some improvement compared to last year.

The latest cohort default rates, released Friday by the Department of Education, show 13.4 percent of student borrowers whose first payments came due in fiscal 2009 had fallen behind by last September, or within three years of entering repayment. That was down slightly from a 13.8 percent trial rate calculated last year for the cohort that entered repayment in 2008.

Still, default figures are “really the tip of the iceberg when it comes to looking at borrower distress,” said Debbie Cochrane, research director at The Institute for College Access and Success in California. “For every borrower that defaults on their loans, there are many more in distress, struggling to make repayments.”

The department traditionally has measured default rates by the number of borrowers falling behind within two years of entering repayment, but is shifting to a three-year measurement to better capture the number of students who eventually can’t make payments.

The latest two-year default rate rose slightly, from 8.8 to 9.1 percent, which followed a sharp jump from 7.0 percent a year ago. Those latest two-year figures translate to 375,000 of the 4.1 million students who borrowed in fiscal 2010 falling quickly into repayment problems.

The overall numbers may have been helped by new regulations and efforts to improve default rates at a number of larger for-profit chains, though students at for-profit schools remain far more likely to fall into default than their counterparts elsewhere. The latest figures show 22.7 percent of students at for-profits default within three years, though that’s down from 25 percent a year ago.

The comparable three-year default figures are 11 percent at public institutions and 7.5 percent at private nonprofits.

Critics contend default rates are higher at for-profit colleges because they provide poor value for money, have poor graduation rates, and have too few incentives to ensure their students succeed in the job market. Cochrane also believes for-profits are finding ways to game their default figures.

For-profit colleges say they’re working to improve and argue higher default rates are to be expected because they serve lower-income students.