The number of borrowers defaulting on federal student loans has jumped sharply, the latest indication that rising college tuition costs, low graduation rates and poor job prospects are getting more and more students over their heads in debt.
The national two-year default rate rose to 8.8% among students whose first loan payments were due in fiscal 2009 from 7% for those who began repayments in fiscal 2008, according to figures released Monday by the U.S. 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% were already at least 270 days behind in their payments two years later. That was an increase from 11.6% last year.
The default rate increased to 7.2% from 6% at public institutions and to 4.6% from 4% 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 Institute for College Access & Success in Oakland.
Overall, 3.6 million borrowers entered repayment in fiscal 2009; more than 320,000 had already 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% 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 low of 4.6% 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% when the government made preliminary calculations of how many defaulted within three years. Beginning next year, the department will begin using the figure for how many default within three years to determine which institutions will lose eligibility to enroll students receiving government financial aid.
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% for college graduates remains substantially lower than for those without a degree. But many students don’t finish the degree they borrow to pay for.
The Department of Education has begun an income-based repayment plan that caps federal loan payments at 15% 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 flatly that those schools — along with the weak economy — are largely to blame for the increases. Among some of the largest and better-known operators, the default rate at the University of Phoenix chain rose to 18.8% from 12.8% and at ITT Technical Institute it jumped to 22.6% from 10.9%.