Student loan default rate drops, but reporting is fuzzy

by Grace

The default rate for federal student loans dropped from 14.7 percent to 13.7 percent last year.  That’s a good sign, but it is informative to look a little more closely at the reporting.

How the default rate is determined

Default rates are based on the number of students who’ve defaulted on at least one student loan three years after leaving college. It takes at least 9 months of non payment for a default to take place and show up on one’s student loan record and credit report. The default rate has nothing to do with whether borrowers will default later while on repayment plans that can last up to 30 years.

The government “adjusted” the default numbers to protect some colleges from losing federal aid.

… the talk among advocates, reporters, and policy wonks on Wednesday was less about the drop than about the Education Department’s last-minute tweak of its own numbers. That “adjustment,” which spared some colleges whose high rates would have cost them their ability to award federal aid, has reanimated the debate over default rates, long derided as a poor measure of institutional quality.

In news releases and on social media, many said the eleventh-hour reprieve undermined what little credibility the rates had, weakening them as an accountability measure.

For colleges at risk of losing federal aid, the government bureaucrats excluded from their report “any borrower who had loans with multiple servicers and defaulted on only one of them”.  Apparently the rationale for this adjustment is that it is believed borrowers with multiple accounts usually default is because it’s so hard to keep track of all their loans.  Thus, colleges should not be penalized.  Uh, okay.  In any case, considering that the default rate is high even with excluding so-called confused borrowers means other reasons are at play.

 Why students are still defaulting

It’s hard to know the exact reason why students default, but there are three reasons that are pointed to the most: not finishing college, lack of employment post graduation, and lack of financial education. The first two reasons make sense. If you don’t have a job or you don’t feel you’ve finished your education, you may be fearful of student loan repayments. However, lack of financial education is really the main reason for most defaults. Why? So many repayment plan options exist, including Pay as You Earn, where borrowers may not have to pay anything when their income is low enough. Monthly payment amounts under the Pay as You Earn plan are adjusted annually based on income and there is a 20-year cap on loan payoffs. Temporary payment breaks also exist that also have kept borrowers out of default for those first three years in repayment.

The government has made attempts to promote the various reduced loan repayment options because supporters believe ‘millions of borrowers who qualify but do not participate are “effectively leaving a rather sizable amount of money on the table”’.  One of the latest promotions has been in partnership with Turbo Tax.

Turbo Tax users will see information about loan repayment options and a link to the Department of Education website in a section of the program called “My Money Tools.”

They are provided with a link to a calculator that uses tax information, including their adjusted gross income, marital status and household size to determine eligibility for income-based and other income-dependent repayment programs.

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Reyna Gobel, “Federal Student Loan Default Rate Drops”, Forbes, 9/28/2014.

Kelly Field, As Default Rates Drop, So Does Confidence in How the Education Dept. Counts Them”, Chronicle of Higher Education, September 25, 2014.

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