Despite all the concern about the student loan crisis in our nation, student loan default rates have been dropping.
In September 2019 the Department of Education’s Office of Federal Student aid released data showing two consecutive years of falling default rates. Only about 450,000 people or 10.1 percent of students who graduated or dropped out of college during the 2015-16 academic year defaulted before the end of September 2018. One can think of it as a measurement of students who go into default shortly after leaving college.
The latest figure is a drop of 1.4 percentage points from the default rate of students who graduated or left school in 2013-14. Even this small percentage drop means that more than 100,000 fewer people are going into student loan default annually. And it’s a whopping 4.6 percentage point drop from the peak default rate of 14.7 percent of students who graduated or left school during the 2009-10 year.
I discussed the latest data with two economists who are student loan experts, Sandy Baum at the Urban Institute and Adam Looney at the University of Utah. They pointed to several reasons for the improvement in student loan repayments: a strong job market, fewer students going to colleges with the worst track records and new ways to avoid default by restructuring student loans.
Related: Federal data shows 3.9 million students dropped out of college with debt in 2015 and 2016
What jumped out for both of them is how the shrinking for-profit sector is a major driver of the latest improvements. Two years earlier, there were 1.25 million students coming out of for-profit colleges and universities who were expected to start paying their loans back. In 2015-16, there were 985,000 students coming out of for-profit colleges — 265,000 fewer students. The default rates haven’t improved much. More than 15 percent of these graduates and dropouts defaulted in both time periods. But the drop in students means that 44,000 fewer people are defaulting across the nation, from almost 200,000 students going into default from for-profits to 150,000 students going into default in the latest period.
Default rates are much lower at public and private nonprofit institutions. And these rates have been dropping further, in part because of a stronger job market. For example, at four-year public colleges, the default rate dropped from 7.5 percent to 6.8 percent. That’s amounts to roughly 120,000 students in default from the class of 2015-16, down from 132,000 students in the class of 2013-14. Private four-year institutions posted a similarly low default rate of 6.3 percent.
A third reason for improving default rates is the decline in enrollment in the two-year community college sector. Like the for-profit sector, two-year colleges have very high default rates among their students. That’s because community colleges cater to lower income students and dropout rates are high. Students turned to community college during the recession to improve their job prospects but with the economic recovery, more people went straight into the labor force. Fewer community college students means fewer defaulters.
Related: The new low-income big borrower of student loans
Community college defaulters declined by more than 50,000 students between fiscal 2014 and fiscal 2016. But the loan amounts are much lower than at for-profit institutions because community college tuition is much cheaper. So for taxpayers, community college defaulters aren’t as much of a burden.
A fourth reason for declining default rates is the rise of income-based repayment plans. All student borrowers are eligible to convert their monthly student loan bills into a share of their income. Debtors pay between 10 percent and 20 percent of their income and their balance is forgiven after 20 or 25 years (instead of the usual 10-year loan period). These income-based repayment plans have been available since 2009 and more students are becoming aware of them.
If you’re unemployed, you don’t have to pay anything and your loan remains in good standing. “There’s no need for you to default,” said Baum. “But there’s a bureaucracy. And for some people, they’re unable or unwilling to deal with it. We don’t automatically put people into income-based repayment or defer their payments.”
Almost a half million Americans who left college in 2015-16 didn’t bother with the paperwork to convert their loans and went into default instead. To be sure, it’s tough for many low-wage earners to spare even 10 percent of their income to pay back loans if they’re also caring for children or parents and so an income-based repayment plan may not feel like a viable solution for everyone.
Related: The heaviest college debt burdens fall on three types of students
Avoiding default is good for the individual. Default ruins your credit and can destroy your ability to get a credit card, rent an apartment or even get a job. But for people who care about public policy, default rates were a way of monitoring which students were in distress and which types of institutions were producing the shakiest student loans. Many people who might have been in default before 2009 are now in income-based repayment plans but not really able to pay their loans. But because they’re not reflected in the default rates, it’s getting harder to figure out where the problems are.
“It is clearly better that the default rate is going down, from the perspective of students,” said Looney. “It can be a blemish that impedes your ability to function as an adult in society. But to some extent, default rates are going down because of income-based repayment. And that doesn’t necessarily indicate that the economic outcomes of the students have improved. It just means that instead of having the student default and ruin their credit, they’re in a plan. But they’re still otherwise in the same bad economic circumstances.”
The Department of Education also released default rates by state. Nevada topped the list with an 18 percent student loan default rate. But it was a relatively low number of people in default — only 6,000. Meanwhile, Indiana’s default rate of 14 percent was much lower but it represents almost 24,000 students who went into default after leaving school in 2015-16. See the accompanying interactive maps to see the default rate and number of defaulted borrowers in your state.
Student default rates by state
The map above depicts student loan default rates by state for students who left college in 2015-16 and went into default before the end of September 2016. States in red have higher than average default rates. States in green have lower than average default rates. States in white have average default rates. Point your cursor inside any state to see the exact student loan default rate. Data source: https://www2.ed.gov/offices/OSFAP/defaultmanagement/cdr.html Map created by Jill Barshay/The Hechinger Report using Google charts.
Number of defaulted borrowers by state
This map shows how many student loan borrowers who left college in 2015-16 in each state went into default before the end of September 2018. Larger circles depict greater numbers of borrowers. Point your cursor to any dot to see how many students went into default shortly after leaving school in each state. Data source: https://www2.ed.gov/offices/OSFAP/defaultmanagement/cdr.html Map created by Jill Barshay/The Hechinger Report using Google charts.
This story about student loan default rates was written by Jill Barshay and produced by The Hechinger Report, a nonprofit, independent news organization focused on inequality and innovation in education. Sign up for the Hechinger newsletter.