Student Loan Defaults Drop, but the Numbers Are Rigged

College debt is crushing more graduates than the data show.
Photographer: Seth McConnell/Denver Post via Getty Images

The good news is that Americans are taking longer to default on their federal student loans, the U.S. Department of Education announced Wednesday. The bad news is that the overall number of defaults continues to rise.

How can this be? Well, defaults fell by a half percentage point, to 11.3 percent, compared with a year earlier. This measures the number of former students who went 360 consecutive days without making a payment since their first bill came due in fiscal year 2013.

About 593,000 former college students out of 5.2 million total borrowers defaulted on their federal debt as of Sept. 30, 2015, the department said. Default rates at public and for-profit colleges dipped, while private, nonprofit schools experienced a slight increase.

Former students who feel duped may take solace in knowing their alma maters could be on the hook, too. Schools whose former students default at sky-high rates—at least 30 percent for three straight years or more than 40 percent during the most recent year—can lose access to the nearly $130 billion in annual student loans and grants made available to colleges.

With so much at stake, it’s probably not a surprise the system is being gamed. The default rate doesn’t accurately represent the degree to which former students struggle to repay their loans, federal officials and higher education experts have said. This is because of school efforts to push back eventual defaults to later years by persuading students to postpone payments under federally approved programs. Of 6,155 schools with default rates, just 10 may lose access to federal student aid as a result of their high default rates, the department said.

The so-called cohort default rate published by the Education Department is “susceptible to artificial manipulation,” the White House said in a report last year. The share of borrowers paying down their loans, which the Obama administration publicly released for the first time last year, “more accurately reflect[s] the borrowing behavior of students than default rates,” the White House said.

The difference between the cohort default rate and the nonrepayment rate at junior colleges is about 25 percentage points, the White House said. At four-year schools, it’s about 12.5 percentage points. For-profits have a 30 percentage-point differential. That’s a lot of misery missing from the numbers.

Student loan default has taken on critical importance as debt burdens surge to record levels, risking the spread of contagion to the broader economy as struggling debtors cut spending and other forms of borrowing. Some 41.5 million Americans collectively owe nearly $1.3 trillion on their federal student loans, Education Department data as of June 30 show. About one in every four borrowers is either delinquent or in default. Total indebtedness has doubled since 2009.

Data analyzed by researchers at the Federal Reserve Bank of New York and the Treasury Department suggest that student loan defaults within the first three years of repayment account for only about half the total number of eventual defaults. In fact, more than twice as many borrowers who entered repayment in 2009 had defaulted by their fifth year than by their third year, according to research published last year by the Brookings Institution.

For example, in the year that ended June 30, more than 1.1 million Americans defaulted on student loans direct from the Education Department. Loan defaults are up 2.7 percent through the first three fiscal quarters of this year compared with 2015, data show. The Obama administration's goal is to have a “zero default rate," Education Undersecretary Ted Mitchell said last year.

“Even with progress, we know considerable work remains ahead,” Education Secretary John B. King Jr. said.

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