Student Loan Default Rate Now Under 10 Percent

US Education Department Press Releases, Oct 26, 1998

Archived: Student Loan Default Rate Now Under 10 Percent A r c h i v e d  I n f o r m a t i o n FOR RELEASE October 26, 1998

Contact: Jane Glickman (202) 401-1307 Stephanie Babyak (202) 401-2311 STUDENT LOAN DEFAULT RATE NOW UNDER 10 PERCENT -State by State Rates-

The national student loan default rate has dropped below 10 percent for the first time, falling to 9.6 percent for fiscal year 1996, U.S. Secretary of Education Richard W. Riley announced today. This marks a decline in the default rate for the sixth consecutive year, since rates hit a high of 22.4 percent for FY1990.

"Reducing historically high default rates has been a priority for the department as well as our nation's postsecondary schools," Riley said. "With hard work, commitment and responsible use of enforcement sanctions authorized by Congress, we have met our target date of lowering rates to 10 percent or less by the year 2002 well ahead of schedule. We've kept faith with taxpayers and students to ensure that federal dollars aren't wasted on shoddy education programs and that borrowers from the federal purse take their financial obligations seriously."

Riley said that the strong economy and low unemployment have contributed to the decline in defaults and credited efforts by all the participants in the student loan programs -- students, schools, lenders and guaranty agencies, as well as the department.

The new national default rate is for FY 1996 -- the most current data available -- and represents the cohort of borrowers whose first loan repayments came due in FY96, and who defaulted sometime before Oct. 1, 1997. The national rates reflect default rates for more than 7,000 individual schools that participated in the Family Federal Education Loan Program (FFEL) and the William D. Ford Federal Direct Loan Program at that time. [Lists of individual school default rates provided to reporters do not include some 1,500 schools that are no longer participating in the federal loan programs.]

This year the default rates have declined for every type of institution -- public and private, both four-year and two-year institutions, and proprietary schools with programs of all durations.

Student loan volume has more than doubled in this decade. In FY1998, some 5.9 million students borrowed $38 billion in federal loans.

"There's no safe harbor remaining for schools that aren't doing the job of educating students," Riley said. "Protecting the public's investment in all our federal student aid programs is a priority."

Riley noted that an important new provision in the Higher Education Amendments of 1998 can help keep the default rates down if borrowers act quickly. "Between now and Jan. 31," Riley said, "borrowers can refinance their outstanding federal student loans at the low current interest rate of 7.46 percent by taking out a Direct Consolidation Loan or contacting any FFEL lender, which can also provide the new rate although are not required to do so. I would encourage graduates with debt to consolidate their loans now while the interest rate is low, and lower their monthly payments."

After Jan. 31, the consolidation rate will rise to the average rate of the underlying loans, weighted by loan size and capped at 8.25 percent. The Clinton Administration had sought to keep the interest rate on consolidation loans consistent with the rate on new loans, currently at 7.46 percent, but the Congress extended the low rate only until Jan. 31, 1999.

Riley noted that while the rise in the cost of a college education continues to outpace inflation, the Clinton Administration has helped secure several new initiatives in the past few years to limit the amount of debt students have after they graduate and make it easier to manage the debt they do take on. He cited the $1,500 Hope Scholarship Tax Credit for the first two years of college; the Lifetime Learning tax credit for juniors, seniors, graduate students and working adults; deductions for interest on student loans, and Education IRAs. He added that Pell Grants for the neediest students have increased 36% in the last few years, from a $2,300 maximum award in FY 1994 to $3,125 for FY 1999, college work study opportunities have expanded, and students can now repay debt on an income contingent basis.

Today's release of the FY96 default rates marks the second year that default rates for schools that issue direct loans are included. A total of 1,076 schools had direct loans entering repayment for FY96, with a default rate of 5.0 percent. The national cohort default rate data is comprised of 7 percent direct loan data. The William D. Ford Federal Direct Loan Program began in the 1993-94 school year.

Schools with excessive default rates may be dropped from one or more federal student aid programs. Schools with default rates of 25 percent or greater for three consecutive years face loss of eligibility to participate in the FFEL, direct loan and Pell Grant programs. Schools have appeal rights and can remain in the loan programs while an appeal is pending.