Student Loan Default Rates Drop

The U.S. Department of Education announced on Wednesday, September 24, 2014, that the national 3-year cohort default rate (CDR) for federal student loans had decreased from 14.7% to 13.7%. This is the first improvement in the cohort default rate since the start of the subprime mortgage credit crisis.

If current trends continue, next year’s cohort default rates are likely to decrease by an additional percentage point. The U.S. Department of Education releases preliminary cohort default rate data to schools in February or March and publishes official cohort default rates in mid- to late-September after schools have had the opportunity to challenge errors in the draft data.

Cohort default rates at for-profit colleges decreased by a much greater rate than cohort default rates at other colleges. As the following table illustrates, the 3-year cohort default rate decreased by 0.1% at public colleges, 1.0% at private non-profit colleges and 2.7% at private for-profit colleges. Most of the decrease at private for-profit colleges occurred at 2-year and 4-year colleges, where the 3-year cohort default rates decreased by 1.6% and 3.5%, respectively, with a negligible change at less-than-2-year colleges.

Institution Type FY2010 CDR FY2011 CDR Change in CDRs
Public 13.0% 12.9% -0.1%
Private Non-Profit 8.2% 7.2% -1.0%
Private For-Profit 21.8% 19.1% -2.7%
Overall 14.7% 13.7% -1.0%

The 3-year cohort default rate is a short-term measure of recent borrower repayment behavior. It reports the percentage of borrowers entering repayment one federal fiscal year who default by the end of the second following fiscal year. For example, the FY2011 3-year cohort default rate reports the percentage of borrowers entering repayment from October 1, 2010 to September 30, 2011 who default by September 30, 2013.

Long-term default rates are about double short-term default rates. But, long-term default rates are necessarily backward-looking, reporting the repayment behavior of borrowers who entered repayment decades in the past. Long-term default rates do not measure the performance of more recent borrowers.

Private lenders report a charge-off rate instead of a cohort default rate to try to measure the recent repayment behavior of all borrowers. The charge-off rate reports the percentage of loan dollars in the overall student loan portfolio that were written off as uncollectible during the last year. Charge-off rates aren’t necessarily comparable from one year to the next, since they are influenced by the maturity of the student loan portfolio. Most defaults on student loans occur within the first five years of a borrower entering repayment on his or her student loans. So, a more mature student loan portfolio will necessarily have a lower charge-off rate.

Approximately 9% of loan dollars and 14% of borrowers are in default in the federal education loan portfolio. When borrowers who are still in the in-school or grace period are excluded, approximately 11% of loan dollars and 17% of borrowers are in default on their federal education loans.

The Higher Education Opportunity Act of 2009 (P.L. 110-315) switched from a 2-year cohort default rate to a 3-year cohort default rate starting with the FY2009 cohort because of a 2003 report by the Office of the Inspector General at the U.S. Department of Education, Audit to Determine if Cohort Default Rates Provide Sufficient Information on Defaults in the Title IV Loan Programs. The report found that even as 2-year cohort default rates decreased, the volume of defaults by the third year remained unchanged. This suggested that schools and lenders were manipulating the 2-year cohort default rates by encouraging borrowers to obtain deferments and forbearances. This pushed the eventual default outside the measurement window.

The 3-year cohort default rate is higher than the 2-year cohort default rate because it has a longer measurement window. Since it takes 360 days of non-payment for a borrower to be in default on federal student loans, the 3-year cohort default rate involves a 2-year window during which the default can occur. This compares with the 2-year cohort default rate, where there is just a 1-year window during which the default can occur. Also, if the economy is deteriorating, it can contribute to an increase in the number of borrowers defaulting during the third year of the 3-year cohort default rate. Conversely, a declining ratio of the 3-year cohort default rate to the 2-year cohort default rate can be an indication of an improving economy.

With the publication of this year’s 3-year cohort default rates, the 3-year cohort default rates are now effective for sanctions against colleges and universities with too high a cohort default rate. If a college’s 3-year cohort default rate is more than 40% in a single year or more than 30% a year for three years in a row, the college may lose eligibility for federal student aid.

Unfortunately, the U.S. Department of Education has decided to discontinue publication of 2-year cohort default rates. This prevents longitudinal comparisons of current default rates with older cohort default rates.

This chart shows historical 2-year and 3-year cohort default rates.

Federal Education Loan Cohort Default Rates Chart

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