Bloomberg News

Student-Loan Defaults Rise in U.S. as Borrowers Struggle

September 30, 2013

College Graduates

The federal student loan default rate, for the first three years that students are required to make payments, was 14.7 percent, up from 13.4 percent the year before. Photographer: Jim Watson/AFP via Getty Images

About one in seven borrowers defaulted on their federal student loans, showing how former students are buckling under higher-education costs in a weak economy.

The default rate, for the first three years that students are required to make payments, was 14.7 percent, up from 13.4 percent the year before, the U.S. Education Department said today. Based on a related measure, defaults are at the highest level since 1995.

The fresh data follows the announcement by Barack Obama’s administration that it would seek to restrain skyrocketing college expenses by tying federal financial aid to a new government rating of costs and educational outcomes. The rising number of defaults shows the pain of borrowers, said Rory O’Sullivan, policy and research director at Young Invincibles, a Washington nonprofit group.

“Our generation is behind in the economic recovery and not recovering as fast as we need to,” said O’Sullivan, whose group represents the interests of people ages 18 to 34. “It’s financial disaster for borrowers. Defaults can dramatically affect their credit rating and make it harder to borrow in the future.”

270 Days

Today’s report covers the three years through Sept. 30, 2012. The default rate, which includes graduates and those who dropped out, shows the share of borrowers who haven’t made required payments for at least 270 consecutive days.

The rate doesn’t include those who are putting off payments, through deferral or economic hardship called forbearance, or borrowers who are on federal income-based repayment programs, meaning it understates their hardship, O’Sullivan said.

U.S. borrowers owe $1.2 trillion in student-loan debt -- including government loans and those from private lenders such as SLM Corp. (SLM:US), commonly called Sallie Mae. That sum surpasses all other kinds of consumer borrowing except for mortgages.

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Last year, the Education Department revamped the way it reports student-loan defaults after Congress demanded a more comprehensive measure because of concern that colleges counsel students to defer payments to make default rates seem low. Previously, the agency reported the rate only for the first two years that payments are required.

Worst Performers

Public colleges reported a 13 percent default rate while nonprofit private schools had a rate of 8.2 percent. For-profit colleges fared the worst, at almost 22 percent.

Under the older two-year measure, the rate for all colleges was 10 percent, up from 9.1 percent the year before -- and the highest since 1995.

“The growing number of students who have defaulted on their federal student loans is troubling,” U.S. Education SecretaryArne Duncan said in a statement. “The Department will continue to work with institutions and borrowers to ensure that student debt is affordable.”

To contact the reporters on this story: Janet Lorin in New York jlorin@bloomberg.net; John Hechinger in Boston at jhechinger@bloomberg.net

To contact the editor responsible for this story: Lisa Wolfson at lwolfson@bloomberg.net


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