Rising loan default rate points to troubles for students, recent grads

The national two-year cohort default rate rose to 8.8 percent last year, from 7 percent in fiscal 2008, according to figures released yesterday by the Department of Education.

Driving the overall increase was an especially sharp increase among students who borrow from the government to attend for-profit colleges.

Of the approximately 1 million student borrowers at for-profit schools whose first payments came due in the year starting Oct. 1, 2008 - at the peak of the financial crisis - 15 percent were at least 270 days behind in their payments two years later. That was an increase from 11.6 percent last year.

At public institutions, the default rate increased from 6 percent to 7.2 percent and from 4 percent to 4.6 percent among students at private not-for-profit colleges.

“I think the jump over the last year has been pretty astonishing,’’ said Debbi Cochrane, program director for the California-based Institute for College Access & Success.

Overall, 3.6 million borrowers entered repayment in fiscal 2009; more than 320,000 had defaulted last fall, an increase of 80,000 over the previous year.

The federal default rate remains substantially below its peak of more than 20 percent in the early 1990s, before a series of reforms in government lending. But after years of steady declines it has now risen four straight years to its highest rate since 1997, and is nearly double its trough of 4.6 percent in 2005.

Troubling as the new figures are, they understate how many students will eventually default. Last year’s two-year default rate increased to more than 12 percent when the government made preliminary calculations of how many defaulted within three years.

The figures come as a stalled economy is hitting student borrowers from two sides - forcing cash-strapped state institutions to raise tuition, and making it harder for graduates to find jobs. The unemployment rate of 4.3 percent for college graduates remains lower than for those without a degree.

The Department of Education has begun an income-based repayment plan that caps federal loan payments at 15 percent of discretionary income. And new regulations the Obama administration has imposed on the for-profit sector have prompted those so-called proprietary colleges to close failing programs and tighten enrollment. Both developments could help lower default rates.

Administration officials took pains to praise the for-profit sector for recent reforms, but also said those schools are largely to blame for the current increases. Among some of the largest and better-known operators, the default rate at the University of Phoenix chain rose from 12.8 to 18.8 percent and at ITT Technical Institute it jumped from 10.9 percent to 22.6 percent.

ITT, owned by ITT Educational Services, did not immediately respond to requests for comment. A spokesman for Phoenix, owned by Apollo Group, said colleges throughout the country are seeing increased default rates due to the economy.