Student Debt Grows and Grows: Default Rate on Student Loans Up


More students are defaulting on their loans, the Chronicle of Higher Education reports. According to a U.S. Department of Education report released on Monday, the “cohort default rate” on student loans increased to 8.8 percent, up from 7 percent in the previous year. That is, 320,000 out of 3.6 million student-loan borrowers whose first repayment period landed between October 1, 2008 and September 30, 2009 defaulted before September 30, 2010.

The cohort default rate measures the proportion of students who defaulted within two years of entering the repayment period. In 2008, the cohort default rate at for-profit institutions was 11.6 percent; in 2009, it was 15 percent. At public institutions, the default rate increased from 6 percent to 7.2 percent; at private universities, it increased from 4 percent to 4.6 percent. Taken together, these figures indicate an overall faster rise in default rates.

For recent college graduates, the consequences of defaulting could stay with them for years. A default could severely impact their credit rating, making it far more difficult for them to buy a car or house, or even rent an apartment and get a job.

Why the Increase?

James R. Kvaal, deputy under secretary of education, noted two trends. With the unemployment rate at 9.1 percent and no new jobs added in August, the economic outlook for students remains gloomy. Kvaal specifically cited a “strong correlation between student-loan default rates and unemployment rates, as well as credit-delinquency rates.” Second, he pointed out that growth in for-profit colleges has pushed up the default rate overall:

In fact, more than half of the total increase in the number of defaulters from 2008 to 2009 arose from the for-profit sector. There were 81,000 more defaulters in 2009 than in 2008, and 49,000 of them, or about 60 percent, came from the for-profit side.

Debbie Cochrane, a program director at the Institute for College Access & Success, notes that, while it is hard to single out one reason that more students are defaulting on their loans, “allegations of deceptive or fraudulent recruiting practices in the sector, including misrepresenting college graduation rates to potential students to encourage them to enroll and take out loans.”

As Mark Kantrowitz, publisher of FinAid, a site with information on student aid, points out, for-profit colleges should not necessarily be singled out for the rise in the student default rate. For-profit colleges typically enroll more low-income students who are less likely to graduate; students who fail to graduate are three times as likely to default on their loans.

A Little Known Program Could Help Borrowers

As the New York Times says, a recent study by the Institute for Higher Education Policy has found that, for every student who defaults, two more fall behind in their payments. Only 37 percent of borrowers who started to pay back their loans in 2005 were able to do so on time, the study found. An income-based repayment program that began in 2009 could help many borrowers who are unemployed or earning little, but it is not widely used:

Under the program, borrowers who pay 15 percent of their discretionary income for 25 years — 10 years if they are in public service — can have the rest of their federal student loan debt forgiven; in 2014, that will go down to paying 10 percent of discretionary income for 20 years.

“In the age of income-based repayment, there is no reason for a student to default, since even a payment of zero dollars is acceptable payment, if you have zero discretionary income,” Ms. Cochrane said. “But as of April of this year, only about 350,000 borrowers have entered income-based payment, a small subset of the eligible population. Students need to understand the options, colleges need to share the information, and the department needs to make it as easy as possible for students to enroll.”

Community Colleges Receiving Less State and Federal Funding

Another report, “Trends in College Spending, 1999-2009,” by the Delta Coast Project, “paints a picture of higher education in the United States as an enterprise that is turning increasingly to tuition increases to fill financing gaps—a trend that fuels students’ and parents’ unease about the cost of higher education.” The report, says the Chronicle of Higher Education, finds that community colleges have been the hardest hit by a downturn in educational spending. With growing enrollments and less support from state and federal sectors, community colleges saw their funding for educational and related activities shrink by 3.4 percent from 2008 to 2009. Any “new money” that is coming into higher education is coming from tuition and student fees.

Mindful of the importance of a college degree, students who don’t have the funds on hand for tuition have no choice but to take out loans — and if there are no jobs for them after they finish college, they face the likelihood of joining the ranks of borrowers who default.


Related Care2 Coverage

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Student Loan Debt Could Cause the Next Financial Crisis


Photo by meddygarnet


Dianne Robertson
Dianne Robertson6 years ago


Marina Brennan
Marina B6 years ago

This is very sad. Most students at my college take out loans, some hold jobs. But if you can only work 15 hrs a week without detriment to your education, how much of it can really finance while you are in school?

Mo Va
Mo Va6 years ago

Very sad fact... Any education loan's rate should not be based on daily compound interest...
For example, you took $1000 education loan (@ 5 percent each year). Let me compute.. $1000 x .05 x 5 years = $250. you can pay back $1250 one time Or you make payment $250 each year for 5 years. I know the greedy lenders disagree with me. I don't care what they say.

Diane Mckinney
Diane Mckinney6 years ago

And remember, it's not going to get any better since Obama just handed out millions of green cards to illegal aliens.

Kaitlin Carney
Kaitlin Carney6 years ago

I will be $10,000 in debt by thee time I am done with my undergraduate degree, and I attended a community college and live as cheaply as possible. Dorms are way too expensive for low income students, at both schools I attended it's $1000 per month to live in dormitories. There are no cheap ways to go to school anymore. If you don't have parents to pay for everything, you're screwed because no one will hire a college student and there is no financial aid to be found. I am so disillusioned by the state of education, I am not attending to make money, because I know I'll be in debt the rest of my life from getting a higher education. I just want to do what I love. For a poor girl like myself, apparently that's asking too much from the supposed 'land of opportunity'.

Jamie Clemons
Jamie Clemons6 years ago

If we ended the Iraq and Afghanistan wars we could afford to send all the kids to college free for 10 years.

Jamie Clemons
Jamie Clemons6 years ago

Big shocking suprise here. No jobs default rate up. I am so shocked.

Kimberly Thorne
Kimberly Reinitz6 years ago

I recently saw a cartoon that was an adviser speaking to a potential college student. It said "You need to take out student loans so you can go to college so you can get a job to pay off your student loans" and that pretty much seems what it is. There aren't that many jobs available and the ones that are available do not pay very much unless they are in the math or science. Not everyone is very interested in those topics or does very well in them. It seems in some circumstances its almost not worth it to go to college anymore unless it is technical school/trade school or college program that is low on cost and/or is only a year or 2 long.

Vince D.
Vince D6 years ago

I rent to students and do my best to keep their cost down. Unfortunately, I have had to begin running credit reports to weed out those who don't take their obligations seriously. (Long story!)

I am seeing students with huge credit card defaults. One applicant had $50K written off by creditors. These are the minority, but why is any bank giving out this amount of credit?

I had one student who never missed a payment, but had $80k in student loans. (At a small state university...) She also had a closet of fancy clothes and a new car!

Colleges are building new fancy, often privately owned, dorms that cost almost double what traditional dorms cost. Students are taking out loans to live in these luxury digs.

OK, perhaps I'm a little old fashioned, but when I went to college, most of us were on the extreme austerity plan. Our families were sacrificing to send us to school and that was a great motivation to take our studies seriously. The current model as college as a 4 (5?) year luxury vacation is not a good model.

Austin R.
Austin Rotter6 years ago

Students need to live within their means? what kid making minimum wage could ever afford any university costs? Loans are an inevitable for most looking for higher education. to think otherwise is completely ignorant.