About that Default Rate…

Recently many people have become concerned with the default rate on student loans. Since the collapse of the economy default rates on student loans have increased. This is especially the case for people who attended for-profit schools. More than 20 percent of students from for-profit schools default after three years. The true default rate might actually be worse, however.

According to an article by Kelly Field in the Chronicle of Higher Education:

According to unpublished data obtained by The Chronicle, one in every five government loans that entered repayment in 1995 has gone into default. The default rate is higher for loans made to students from two-year colleges, and higher still, reaching 40 percent, for those who attended for-profit institutions.

Right, in fact it’s actually 20 percent of all students who default. The reason the official numbers for default rates look so much better has to do with how the federal government tracks default rates. The current official measure is the “cohort-default rate.” This measures only borrowers who default on their student loans within in the first two years of their repayment period. According to Field, that measure actually only accounts for “a sliver of the loans that eventually lapse.” Many graduates end up defaulting years later.

Because of 2008 legislation, beginning in 2011 the official cohort-default rate will begin to measure those who default on student loans within three years of the repayment period.

Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer