DOE's Annual Report on Student Loan Defaults Is More Useful than Its Old Reports, But DOE Still Understates the Magnitude of the Student-Loan Crisis

The U.S. Department released its annual report on student-loan defaults a few days ago. For 2011, the percentage of borrowers who defaulted in the first two years of their repayment period was 9.1 percent, up slightly from the previous year.

Of course, most student-loan borrowers don't default in the first two years of the repayment period. According to a  New York Times story, the average time for an overburdened borrower to default is four years.

To get a better picture of the true default picture, DOE began publishing the three-year student-loan default rate.  Measuring default rates during the first three years of the repayment period causes the rate to rise from 9.1 percent to 13.4 percent.  For students who borrowed to attend for-profit colleges, the three-year default rate is higher--22.7 percent. In other words, more than one out of five students who borrowed to attend for-profit institutions defaulted within three years of the beginning of their repayment obligation according to DOE's most recent report.

How about the percentage of borrowers who default over the life of the loan?  The number is very high, particularly for the for-profit sector.  According to a DOE estimate (as reported in the New York Times), 49 percent of the students who borrow money to attend a for-profit college will ultimately default on their loans!

It should be obvious to everyone by now that the for-profit sector as a whole has been a failure at preparing students for the 21st century economy. The federal government should not be financing a sector that has a default rate of nearly 50 percent. Nevertheless, a sector that only enrolls about 10 percent of all post-secondary students draws 25 percent of federal student aid money.

This is a scandal, and it has brought great misery to students who borrowed money to attend for-profit colleges and then failed to get jobs that would allow them to pay back the money.

 My guess is that a great many student-loan defaulters have simply given up trying to become economically self-sufficient.  Having defaulted on their student loans, they are unable to participate in the student-loan program again until they pay back their old debt.  Under current bankruptcy law, it is virtually impossible for them to discharge their student loans in bankruptcy. Meanwhile, for most of them, the interest on their loans continues to accrue. Short of emigrating to another country, there is nothing many of these defaulters can do to get a fresh start.

References

Lewin, Tamar. Education Department Report Shows More Borrowers Defaulting on Student Loans. New York Times, September 29, 2012, p. A16..