The US Department of Education published preliminary 3-year cohort default rates (CDRs) for FY2007, FY2006 and FY2005 this morning at the Federal Student Aid Site.
My analysis of these default rates can be found at
Cohort Default Rates.
Some of the highlights include:
3-year CDRs in FY2007 are 64% higher than 2-year CDRs
at public colleges, 71% higher at private colleges and
93% higher at proprietary colleges. These figures
correspond to absolute increases of 3.8%, 2.7% and 10.2%,
respectively. The percentage increases are lower but the
absolute increases are higher than in FY2006 and FY2005,
presumably due to the economy.
14 public colleges (3.1%), 15 private colleges (1.5%)
and 185 proprietary colleges (13.5%) have preliminary
3-year cohort default rates that are above the 30%
threshold, a total of 214 colleges. (This data is
restricted to colleges with more than 30 students
entering repayment.)
Proprietary colleges above the 30% threshold tend to be
smaller colleges. Most of the publicly-traded for-profit
colleges have 3-year CDRs below the threshold.
One public college (0.1%), 2 private colleges (0.1%) and
37 proprietary colleges (2.8%) have preliminary 3-year
cohort default rates that are above the 40% threshold.
Cohort default rates calculate the percentage of borrowers
entering repayment who have defaulted within a given time
period. If one calculates the percentage of total enrollment
that defaults within the 3-year window, in FY2007 0.9% of
students enrolled at public colleges, 1.2% of students
enrolled at private colleges and 10.2% of students enrolled
at proprietary colleges defaulted on their federal education
loans.
Of the 215,212 students who attended colleges with preliminary
3-year cohort default rates above the 30% threshold (and with
more than 30 students in repayment) in FY2007, 148,760 (69.1%)
were enrolled at for-profit colleges, 53,575 (24.9%) at public
colleges and 12,877 (6.0%) at private colleges.
Of the 23,498 students who attended colleges with preliminary
3-year cohort default rates above the 40% threshold (and with
more than 30 students in repayment) in FY2007, 21,503 (91.5%)
were enrolled at for-profit colleges, 161 (0.7%) at public
colleges and 1,834 (7.8%) at private colleges.
I believe that these figures represent a high water mark for the following reasons:
1. Income-based repayment became available on July 1, 2009.
Borrowers in income-based repayment count in the denominator
but not the numerator in calculating the cohort default rate,
just like deferments and forbearances. I believe there will be
a significant number of borrowers using income-based repayment,
which will tend to decrease the default rates. This is partly
because income-based repayment is more available and better
marketed than income-contingent repayment and partly because of
the added incentive of public service loan forgiveness.
2. Colleges have enough time before the 3-year default rates are
used to enforce eligibility for federal student aid to reduce
their default rates through aggressive counseling of borrowers
who are at risk of default (e.g., low income borrowers, borrowers
who do not finish their education), adjusting admission eligibility
standards and through "averaging down" of high default rate programs.
3. New unemployment filings and overall unemployment rates have started
decreasing and job creation will gain momentum in 2010. Job placement
rates are one of the three primary drivers of defaults. The other
drivers are interest rates and graduation rates. (Average borrower
interest rates increased in FY2007 as compared with FY2006 and
FY2005
because of the switch to fixed rates on July 1, 2006 increased the
Stafford loan from 4.5% to 6.8%, a big jump. Likewise the introduction
of the Grad PLUS loan increased the average borrower interest rate on
federal loans. The cuts in subsidized Stafford interest rates for
undergraduate students will start yielding a decrease in average rates
with the FY2008 cohort.)
Mark Kantrowitz
Publisher of FinAid.org and FastWeb.com
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