For the first time ever, the U.S. Department of Education has come out with an official three-year federal student loan default rate.
Until now, the agency has only looked at two-year default rates at universities, and with a wider net cast, it’s clear that students only struggle to pay back loans more with time.
Two years after leaving school, students default on their federal loans at a rate of 9.1 per cent, up from 8.8 per cent at last count. That figure jumps to 13.4 per cent at the three-year mark, the report shows.
Though they’ve seen a slight decrease in two-year default rates, for-profit institutions fared the worst by far on the three-year track, with more than one in five students defaulting after three years. Public and private schools clocked in with 11 per cent and 7.5 per cent default rates, respectively, according to the report.
What’s more, nearly 250 schools were found with a 30 per cent three-year default rate, 37 of which had a rate higher than 40 per cent.
While the situation is undeniably grim, we could see default rates decline over the next couple of years, said Mark Kantrowitz, publisher of Finaid.org.
“Unemployment rates have been improving and probably will normalize around two years from now,” he told Business Insider.
“I would expect, if unemployment rates continue to improve and interest rates aren’t going up, that we will probably start seeing improvement in the default rate probably next year. Maybe it’ll take another year beyond that.”
Since this is the first time the agency has counted three-year default rates, it will continue using the two-year benchmark until it has at least three years’ worth of data on three-year default rates. Sanctions begin when institutions surpass a 25 per cent default rate.
Centro de Estudios Multidisciplinario bills itself as a non-profit private school catering to students in the health field, while Tidewater Tech offers programs in welding, auto technology and hvac training.
The schools could see their federal student aid funding cut as a result, but they will have a chance to appeal.
As for the 200-plus schools with higher than 30 per cent default rates, they will be required to create a student loan default task force.
Keep in mind, this report only looks at federal student loans in default. There’s an estimated $8.1 billion worth of default private loans floating around, according to the Consumer Financial Protection Bureau.
The graph below shows the default rate over the last 23 years. The sharp decline in rates in the early 90s shows the change that occurred after the Department of Education started sanctioning institutions with default rates higher than 25 per cent.
Photo: U.S. Dept. of Education