Background & Analysis

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The federal government makes subsidized student loans available to nearly any student pursuing a postsecondary education. In fiscal year 2014, students borrowed approximately $100 billion through federal loan programs.

The U.S. Department of Education reports annually the rate at which borrowers default on federal student loans. The Department reports default rates using three separate measures of default (cohort, budget lifetime, and cumulative lifetime), each of which focuses on different borrowers, loan programs, and time periods. The Department also publishes default rates for different types of institutions of higher education – including two-year, four-year, private non-profit, public, and proprietary institutions.

By law, the U.S. Department of Education considers a borrower to be in default when he fails to make on-time repayment of his loans for nine consecutive months. This definition applies to all measures of default rates discussed below.

Summary of Federal Loan Defaults as of FY 2014 Q3
Federal Loan Program Outstanding Loans ($ billions) Recipients (millions) Average Amount in Default per Borrower
Direct Loans $37.4 2.6 $14,385
Federal Family Education Loans $60.7 4.4 $13,795
TOTAL $98.1 7.0 $14,014

Source: U.S. Department of Education

Significance of Student Loan Default Rates

Default rates help to gauge the cost of federal student loan programs. According to the U.S. Department of Education, on average the federal government is not able to fully recover losses when a borrower defaults on a federal student loan. These defaults can be costly for the government because it often takes many years to collect on a defaulted loan. The section below on collection and recovery rates for defaulted loans provides one measure of these costs.

Additionally, default rates measure the degree to which borrowers are unable to repay their loans, a proxy for a cohort of borrowers’ ability to find employment after graduation. Therefore, the Department uses an institution’s default rate as one indicator of that school’s quality. The Department also uses default rates to assess the performance of private companies that collect payments, inform borrowers of their repayment options, and perform other administrative roles once the borrower enters repayment. Default rates also indicate the extent to which borrowers are struggling to repay their loans and can help guide policymakers in adopting repayment policies and assistance programs.

Cohort Default Rates

The cohort default rate is a measure of the percentage of federal loan borrowers in either the Federal Family Education Loan Program or the William D. Ford Federal Direct Loan Program that entered repayment during a given federal fiscal year and defaulted before the end of the next fiscal year. (No new Federal Family Education Loan Program awards were made after July 1, 2010; instead, all loans are now made through the Direct Loan Program.) The Department of Education also calculates a separate Perkins loan cohort default rate, but that rate is not included in the figures below. The calculation includes Subsidized and Unsubsidized Stafford Loans, but excludes PLUS Loans and Perkins Loans.

Because the cohort default rate only measures defaults over a two-year period directly after a cohort of students enter repayment, it does not provide the total default rate over the life of the loans. Instead, it primarily captures borrowers who never begin making payments on the loan or who default within the first year after entering repayment.

The Department of Education calculates cohort default rates for schools as well as for private lenders that participated in the now-defunct Federal Family Education Loan program. Federal law requires that the Department of Education use the cohort default rate to test colleges’ eligibility for federal student aid programs. A postsecondary institution cannot participate in most federal student aid programs it if has at least thirty borrowers entering repayment in a fiscal year and its cohort default rate is over 40 percent in a single year or over 25 percent for three consecutive years. Prior to enactment of the Higher Education Opportunity Act of 2008, federal aid eligibility was based on two consecutive years of cohort default rates. The Department of Education is slated to instead use three-year rates to judge eligibility starting with the publication and appeal process for fiscal year 2011 cohort default rates, published in September 2014. The Department began measuring cohort default rates over three consecutive years for the fiscal year 2009 cohort. In 2014, the Department also announced that it would adjust rates at schools at risk of failing the cohort default rate test for students with split-servicing. The official fiscal year 2011 three-year cohort default rate is 13.7 percent: 12.9 percent at public colleges, 7.2 percent at private colleges, and 19.1 percent at for-profit colleges.

National Three-Year Cohort Default Rates
Institution Type 2009 Cohort 2010 Cohort 2011 Cohort
PUBLIC 11.0% 13.0% 12.9%
Less than 2 years 16.2% 16.5% 13.6%
2-3 Years 18.3% 20.9% 20.6%
4 Years 7.9% 9.3% 8.9%
PRIVATE 7.5% 8.2% 7.2%
Less than 2 years 23.1% 21.8% 25.0%
2-3 Years 14.5% 14.2% 12.0%
4 Years 7.3% 8.0% 7.0%
PROPRIETARY 22.7% 21.8% 19.1%
Less than 2 years 21.5% 20.9% 20.6%
2-3 Years 22.9% 21.4% 19.8%
4 Years 23.0% 22.1% 18.6%
AVERAGE 13.4% 14.7% 13.7%

Source: U.S. Department of Education

Though current cohort default rates have remained relatively consistent in the past 10 years, default rates prior to 1991 were significantly higher. By the late 1980s, borrowers at proprietary institutions accounted for more than 80 percent of student loan default dollars, driving up default rates to over 20 percent. In response to these high default rates, Congress passed the Omnibus Budget Reconciliation Act of 1990, which included a provision making institutions of higher education (IHEs) ineligible for federal aid if the cohort default rate exceeded 35 percent in fiscal years 1991 and 1992 or 30 percent for any fiscal year after 1992. Following that legislation, national cohort default rates began to decline sharply before leveling off a decade later. Later, when Congress passed the Higher Education Act Amendments of 1998, federal student loans became non-dischargeable in declaring bankruptcy.

Historical Data: 2-Year Cohort Default Rates
Year National Cohort Default Rate
2011 10.0%
2010 9.1%
2008 7.0%
2006 5.2%
2004 5.1%
2002 5.2%
2000 5.9%
1998 6.9%
1996 9.6%
1994 10.7%
1992 15.0%
1991 High-default schools ineligible
1990 22.4%
1988 17.2%

Source: U.S. Department of Education

Budget Lifetime Default Rates

The Budget Lifetime Default Rate measures the anticipated default rate for Subsidized and Unsubsidized Stafford loans (unless otherwise noted) that entered repayment in a particular fiscal year over an estimated twenty year life of the loan. In other words, it estimates the percentage of loan volume that enters repayment in a given year and is expected to go into default over the following twenty-year period. The Budget Lifetime Default Rate is calculated and reported in the President’s budget proposal for a given fiscal year and the two preceding fiscal years, and is used as a predictor of program costs. It is not calculated for loans made at individual institutions of higher education. It is based on the dollar amount of loans that are expected to enter default, whereas the Cumulative Lifetime Default Rate (explained below) measures the number of loans that have already entered default. Budget Lifetime Default Rates are estimates and therefore subject to variation from year to year due to underlying assumptions and projections.

Budget Lifetime Default Rates
Year Loan Enters Repayment 2007 2008 2009 2010 2011
2-Year Non-Profit/Public 32.1% 31.6% 31.1% 31.4% 33.8%
2-Year Proprietary 47.3% 48.6% 49.0% 48.4% 49.4%
4-Year Freshmen & Sophomores 24.7% 24.0% 23.6% 24.2% 25.4%
4-Year Juniors & Seniors 12.4% 12.3% 12.1% 11.9% 13.0%
Graduate Students 6.2% 6.2% 6.1% 6.1% 6.4%
Weighted Average 15.9% 16.5% 17.3% 17.6% 18.4%

Source: U.S. Department of Education (based on figures published in fiscal year 2014)

Budget Lifetime Default Rates: President's Budgets
Year Loan Is Issued 2010 2011 2012 2013 2014 2015
Subsidized Stafford 18.2% 16.9% 21.8% 24.4% 21.4% 19.4%
Unsubsidized Stafford (Undergraduate)* 18.3%* 16.5%* 17.7%* 20.4% 20.0% 19.7%
Unsubsidized Stafford (Graduate)* -- -- -- 5.6% 5.5% 5.4%
Parent PLUS* 8.2%* 7.9%* 9.9%* 7.7% 7.5% 7.3%
Grad PLUS* -- -- -- 6.0% 5.9% 5.9%
Consolidation 22.6% 20.2% 17.9% 25.0% 20.9% 21.2%
Includes all federal direct student loans (Subsidized and Unsubsidized Stafford, PLUS, and Consolidation Loans)
Beginning with the President's fiscal year 2015 budget proposal, the default rates are split out for undergraduate and graduate Unsubsidized Stafford and PLUS loans for the first time. Data prior to fiscal year 2013 reflect the combined undergraduate/graduate Unsubsidized Stafford and PLUS default rates; data for fiscal years 2013-2015 are all from the 2015 budget request.

Source: White House Office of Management and Budget, Fiscal Year 2011, 2012, 2013, 2014, and 2015 Budget Requests

Cumulative Lifetime Default Rates

Cumulative Lifetime Default Rates measure the percentage of all federal loans (Subsidized and Unsubsidized Stafford, Parent PLUS, and Grad PLUS) that entered repayment in a given fiscal year and have defaulted at some point since, calculated through the most recent fiscal year. The rate is not calculated for loans made at individual institutions of higher education. It includes loans made under the Federal Family Education Loan Program (for which no new awards have been made after July 1, 2010) and the Direct Loan Program. Because the cumulative rate captures defaults that occur from the point at which a cohort of loans enters repayment through the current fiscal year, it changes as more years of loan performance are collected and included in the updated annual calculation. It is intended to be an indicator of the risk of default over the life of a loan.

Cumulative Lifetime Default Rates
Institution Type 2007 Cohort 2008 Cohort 2009 Cohort 2010 Cohort 2011 Cohort
Two-Year Institutions
Private Nonprofit 27.3% 28.9% 25.1% 19.6% 12.4%
Private For-Profit 36.3% 40.5% 35.4% 27.1% 16.7%
Public 25.8% 27.6% 25.8% 23.4% 18.4%
Four-Year Institutions
Private Nonprofit 9.3% 11.3% 9.5% 7.7% 5.3%
Private For-Profit 24.6% 30.5% 26.7% 21.1% 13.4%
Public 10.3% 12.0% 10.8% 9.6% 7.2%

Source: U.S. Department of Education

Collection and Recovery Rates for Defaulted Loans

The U.S. Department of Education publishes data on how successfully it collects on federal student loans that have defaulted. This information is an important indication of the cost borne by the federal government when borrowers default. Costs include unrecovered principal and interest, payments made to private collection agencies to recover defaulted student loans, and the cost of time that elapses during missed payments (i.e. the time-value of money). Collection and recovery rates also illustrate that the federal government is unable, on average, to fully collect on a defaulted student loan in spite of the U.S. Department of Education’s authority to use a number of extraordinary means to collect on the loans. These include garnishing a portion of a borrower’s wages or seizing any federal payment a borrower may receive from the federal government through the Treasury Offset Program.

For loans issued in fiscal year 2013, the Department reports three separate measures of default recovery rates as a percentage of outstanding principal and interest at the time of default. These include a cash recovery rate that includes the principal, interest, and penalty fees that that the Department expects to collect on defaulted loans made in fiscal year 2013; a cash recovery rate net of collection costs that measures recoveries after excluding collection fees assessed on the borrower that the Department of Education must pay to private collection agencies it hires to recover defaulted loans; and a net present value recovery rate that measures recoveries net of all collection costs that is adjusted for the time it takes to collect an a defaulted using the “time-value” of money. The later measure is the most comprehensive measure of a recovery rate. According to the president’s fiscal year 2015 budget request, the federal government expects to eventually recover only 81.8 percent of the principal and interest due at the time of default on Subsidized Stafford loans made in fiscal year 2013 that go into default at any point during repayment.

Fiscal Year 2015 Estimated Federal Student Loan Default and Recovery Rates
Loan Type New Loan Volume ($ Billions) Lifetime Default Rate Recovery Rate (pre-collection costs) Recovery Rate (post-collection costs) Net Recovery Rate*
Stafford $26 22.17% 108.58% 95.98% 81.82%
Unsubsidized Stafford $55 15.07% 105.40% 93.42% 81.14%
PLUS $19 8.03% 99.10% 88.23% 77.25%
*Recovery rate net of collection costs adjusted for collection time using risk-free time value of money.

Source: New America Foundation, U.S. Department of Education

Default Avoidance Assistance for Borrowers

Federal student loans offer borrowers a number of benefits to help them avoid default. These include deferment and forbearance benefits that allow borrowers to forgo required repayments without triggering penalty fees or default. A deferment allows borrowers to postpone loan payments. During this time, the loan will continue to accrue interest unless it is a Subsidized Stafford loan. Students currently enrolled as full- or part-time students automatically enter deferment and the benefit is also available to students who are unemployed or experiencing economic hardship. For students ineligible for a deferment, the Department may approve forbearance on the basis of the borrower’s circumstances to allow him to temporarily stop making payments, make smaller payments, or lengthen the life of the loan without triggering a default.

According to the most recent data from the U.S. Department of Education, 3.3 million borrowers of nearly 30 million total outstanding borrowers in the Direct Loan program are in deferment and 2.2 million are in forbearance, as compared to 2.4 million already in default. Though only 11.7 million borrowers are in repayment, nearly 9 million are still in school and have not yet begun repayment.

Borrowers may also choose one of several repayment plans that allow them to make lower monthly payments than they would under a standard repayment plan to avoid entering default. Under the Income-Contingent and Income-Based Repayment plans, a borrower’s required payments are calculated based on his adjusted gross income and other factors, instead of the amount owed. Under these plans, the federal government forgives unpaid loan balances after a certain period of time. Data from the U.S. Department of Education show, however, that only 1.9 million Direct Loan borrowers are enrolled in one of the income-based repayment plans, including Income-Contingent Repayment, Income-Based Repayment, and Pay As You Earn. Most borrowers are instead enrolled in the standard 10-year repayment plan, which likely carries the highest monthly costs.

Published Oct 28 2014 15:41