The U.S. Department of Education (ED) announced that the three-year federal student loan cohort default rate dropped for all students who entered repayment between fiscal years (FY) 2012 and 2013. The fiscal year runs from October 1 to September 30.
ED claimed a win, but the decrease was slight--11.8% to 11.3%. However, it reinforced a trend where federal student loan defaults have been moving down since FY 2010, when the cohort default rate was 14.7%. This marked the third consecutive year that the overall rate has declined.
"The Obama Administration has taken unprecedented measures to provide borrowers more options to avoid default, manage their student debt and stay on track to repayment and to hold institutions accountable for improving student outcomes," said Secretary of Education John B. King Jr. last month. "Even with progress, however, we know considerable work remains ahead."
Some observers believe that the drop in the cohort default rate is due more to conditions in the larger economy than heavy lifting at ED. "Default rates tend to be driven by changes in unemployment rates, interest rates, graduation rates and the amount of debt," said Mark Kantrowitz, vice president and publisher at Chicago-based Cappex.com. "The Department is trying to suggest that the income driven-repayment plans are the cause of the decline in default rates, but I think the economic recovery deserves most of the credit."
ED has been encouraging borrowers to enroll in one of its income-driven repayment plans, or IDRs. Options have expanded but have also become more confusing. IDRs include the Income-Based Repayment plan (IBR), Income-Contingent Repayment plans (ICR), the newer PAYE, or Pay as You Earn, and the even newer REPAYE, or the Revised Pay As You Earn plans. PAYE lets borrowers cap their monthly loan payments at 10% of their income. Observers have questioned the efficacy of the essentially redundant REPAYE.
Still, the overall default numbers were not small. During the tracking period for the FY 2013 borrower cohort, more than 5.2 million borrowers entered repayment, and 593,182 of them, or 11.3%, defaulted on their loans. Those borrowers attended 6,155 postsecondary institutions across the nation.
The Department has created the American Opportunity Tax Credit, worth up to $10,000 over four years of college, and the College Scorecard and Financial Aid Shopping Sheet to help students and families make informed decisions before enrolling in college. ED made the Free Application for Federal Student Aid (FAFSA) available earlier this year, beginning October 1. This lets students find out about financial aid first, then concentrate on where to go to college. ED increased the Pell Grant max by over $1,000 during the last seven years, tying the grant to the rate of inflation, which has been at historic lows throughout Obama's presidency.
Schools with high default rates may lose their eligibility for student aid programs. This year, nine for-profit schools and one private nonprofit institution could lose ED aid because their loan default rates were 30% or more for three consecutive years or over 40% for the most recent year.
Those schools include Capstone College in Pasadena, Calif.; Total Look School of Cosmetology and Massage Therapy in Cresco, Iowa; Cresent City School of Gaming and Bartending in New Orleans; Larry's Barber College of Chicago; New Life Business Institute of New York City; United Tribes Technical College of Bismark, North Dakota; and Jay's Technical Institute of Houston.