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Federal Student Loan Default Rate Rises Sharply

WASHINGTON, D.C. –  The federal student loan default rate for borrowers who entered repayment in 2009 shot up to 8.8 percent from 7 percent for the previous year’s cohort—a disquieting trend that Obama administration officials attributed to the state of the economy and expansion of the for-profit college sector.

“We think there are two trends behind this default rate that are worth highlighting,” James Kvaal, deputy undersecretary at the U.S. Department of Education, said Monday during a press call.

“One is that borrowers are struggling in the economy,” Kvaal said, noting what he referred to as the “strong relationship” between student loan default rates and unemployment rates, which have remained above 9 percent for most of the past two years.

Kvaal also said the increase in the number of defaulters was due to the growth in the number of for-profit colleges, whose students tend to default on their federal student loans more often than those who attended private non-profit or public institutions.

According to data released Monday by the Education Department, the number of for-profit schools increased from 2,118 in 2008 to 2,147 in 2009—a rise of 29 schools—whereas public colleges increased by only nine schools to 1,627, and private colleges increased by four schools to 1,706 during the same period.

“Many of those (for-profit) colleges offer excellent, innovative programs,” Kvaal said in what has become the administration’s standard way of not branding the entire sector as being ineffective, “but we also see disproportionate federal default rates among students enrolled in those programs.”

Indeed, the default rate at for-profit colleges shot up higher from the 2008 to 2009 cohorts than it did for the same cohorts at other colleges. Specifically, the default rate at for-profits went from 11.6 percent for the 2008 cohort to 15 percent for the 2009 cohort, whereas the default rate only went from 6 percent to 7.2 percent at public institutions, and from 4 percent to 4.6 percent at private, non-profit institutions.

The 8.8 percent of borrowers who defaulted on their loans represent about 320,000 of the 3.6 million borrowers who entered repayment in 2009. The 8.8 percent figure is the highest the default rate has been since the 1997 cohort, which also had an 8.8 percent default rate. The rate eventually went down and fluctuated between 4 percent and 6 percent for subsequent cohorts in the following years but started inching up again in 2007 when it reached 6.7 percent.

Brian Moran, interim CEO, President and General Counsel at the Association of Private Sector Colleges and Universities, which represents the for-profit college sector, said the higher default rates were disappointing but noted that the rates have gone up in all sectors. He also called attention to the role that the economy plays in default rates and sought to focus attention on the future rather than the current state of affairs.

“While default rate calculations are important, to a certain extent this is moving forward by is looking in the rear view mirror,” Moran said in a statement. “Despite today’s disappointing news, we should remain focused on the overarching mission, which is to help individuals rise as high as their talent, ability and ambition will take them.”

Debbie Cochrane, program director at The Institute for College Access &

Success (TICAS), which houses the Project on Student Debt, said the for-profit sector’s role in the default rate increases are too glaring to overlook.

“Certainly, the thing that stands out to us the most is the growth in the for-profit sector and the disproportionate rate at which their borrowers are defaulting,” Cochrane said in an interview with Diverse. “For profits not only have the largest default rate but the largest increase in default rates from the previous year.”

In a statement, Cochrane said that the two-year cohort default rates “are just the tip of the iceberg when it comes to demonstrating the extent of borrower difficulty.”

“Research indicates that most student loan borrowers who default do so after the two-year window is over,” Cochrane’s said in her statement.

Along those lines, Kvaal, of the Education Department, said the department will begin next year to calculate default rates based on three years instead of two in order to get a better sense of how many students are defaulting on their loans.

“We know there are significant numbers of students who default after that two-year period,” Kvaal said. “We think a three-year rate will be a better measure.”

Asked by Diverse for an ethnic or racial breakdown of student loan defaults, Kvaal said the department did not have data to do such a breakdown.

In terms of institutions, the default rate problem did not hit HBCUs—at least not to the point where they would be threatened with the loss of federal funds.

“As of September 2011, all 98 eligible HBCUs have official FY 2009 cohort default rates that fall below regulatory thresholds,” an Education Department web page states. It noted that only one HBCU is subject to cohort default rate sanctions or the consequent loss of Title IV student financial assistance program eligibility.

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