Tuesday, October 1, 2013

How high Is the student loan default rate? Buddy, you don't really want to know.

 How many people have kissed my girlfriend, Eddy Arnold asked in one of his greatest hit songs. "How many, how many, I wonder. But I really don't want to know."

No, Eddy decides he would rather remain ignorant. In fact he instructs his girlfriend not to tell him about her former lovers, even if he asks.  "So always make me wonder," Eddy Arnold crooned. "Always make me guess. And even if I ask you, darling please don't confess."

Eddy Arnold
"I really don't want to know."
That's kind of the way the Department of Education feels about the federal student loan program.  Every autumn, DOE reports on the federal student-loan default rate.  But DOE's measure vastly understates the true default rate.  Like Eddy Arnold, DOE really doesn't want to know the truth. Or maybe DOE knows the truth and doesn't want us to know.

Nevertheless, let's look at DOE's latest report on student-loan default rates. According to DOE, 14.7 percent of students who began repayment in the 2010 fiscal year defaulted within three years. As usual, the default rate is highest in the for-profit college sector.  About one in five people who attended for-profit colleges  (21.8 percent) defaulted within three years of beginning repayment.

I've said this many times, but it bears repeating: The true student-loan default rate--the percentage of students who default over the lifetime of their entire loan-repayment period--is probably double the rate that DOE announced this week. In other words, the true default rate for all student borrowers is about 30 percent and the rate for people who took out loans to attend for-profit colleges is at least 40 percent.

As Senator Tom Hawkins' Senate Committee Report on for-profit colleges spelled out, the for-profit colleges are very sophisticated when it comes to managing their institutional default rates. They encourage former students who are in danger of defaulting during the first three years of repayment to apply for economic hardship deferments. Borrowers who get deferments are not counted as defaulters even though they are not making their loan payments. And these deferments are very easy to get.

How many people have obtained some kind of deferment or forbearance on their student loans? Almost nine million people, according to the Consumer Financial Protection Bureau. That's nine million people who are not making loan payments but who aren't counted as defaulters.

Of course some people who get economic hardship deferments will eventually make their loan payments, but a lot of them will not. And those people are not included in DOE's default rate.

When we look at all the evidence, it is hard to escape the conclusion that the federal student-loan program has wrecked the lives of about 30 percent of the program's participants. Isn't it time we confront this stark reality?

But DOE, Congress, and the higher education community don't want to face the truth.  And so DOE continues to post its misleading student-loan default rates and the total amount of student-loan indebtedness continues to rise.  


Nick DeSantis. Default rate on federal student loans climbs again. Chronicle of Higher Education, September 30, 2013. Accessible at: http://chronicle.com/blogs/ticker/default-rate-on-federal-student-loans-climbs-again/66985?cid=pm&utm_source=pm&utm_medium=en

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