Fewer people are defaulting on student loans within a few years of leaving school, the Department of Education announced Wednesday.
The three-year default rate on federal loans fell to 13.7 percent for people who left school in 2011, down from 14.7 percent for 2010., but higher than the 13.4 percent of people who defaulted on payments within three years after leaving school in 2009.
Default rates dropped among all types of schools, with the biggest change seen for people who went to for-profit schools. However, those students still had the highest default rates, with 19.1 percent of students defaulting on payments within three years of leaving school. And nearly half of the 650,000 people who defaulted in 2011, or 44 percent, went to for-profit colleges.
The department touted the expansion of flexible repayment options, such as the Income Based Repayment Plan, which caps payments at 10 or 15 percent of a borrower’s income. The department also said it is looking at ways to better inform students about their repayment options before their bills come due. But analysts and economists say the policy changes don’t fully explain the drop.
“The decline in overall rates is almost certainly the result of multiple things,” said Pauline Abernathy, vice president of the Institute for College & Success.
For one, the economy is improving, Abernathy says. As more recent college graduates land jobs, it makes sense that more of them could pay back their loans. (Still, many of those jobs don’t require college degrees, causing some grads to feel underemployed.)
And the drop may not necessarily mean that more people are better about repaying their loans, says Ben Miller, a senior policy analyst for the New America Foundation. Some people may be avoiding default through options like deferment and forbearance, which delay payments, without requiring them to pay down their loans, he says. Some schools are also growing better at steering people to those programs to reduce their own default rates, he says.
The lower default rate may be also partly explained by a recent change to the way rates are calculated. The department announced this week that it reduced the default rates for some schools that were at risk of having their access to federal financial aid restricted because of high default rates. The changes were related to borrowers paying multiple loans who may have defaulted on one loan but continued to make payments on another loan, but the department said the number of students in that situation is minor.
The Department of Education has been criticized for not doing enough to make sure borrowers are steered to the right repayment option after falling into default. After a critical report from the Office of the Inspector General pointed out that the department doesn’t penalize debt collectors who have a high number of consumer complaints, the department announced last summer that it would start reducing payments for such collection agencies. It’s too soon to know yet how much those complaints will affect payments.
Department officials also announced in August that they were revamping their contracts with student loan servicers, which handle the billing and other services in the fund, to encourage them to provide counseling. The changes also put greater emphasis on customer satisfaction when evaluating loan servicers.
That said, many students are benefiting from the expansion of income-based repayment options. Most people with federal student loans may qualify for a version of the program. Workers who take public sector jobs or who go to work for nonprofits may see their debt forgiven after 10 years of qualifying payments. The rest may see debt forgiven after 20 or 25 years of payments, depending on the program. Borrowers need to apply through their loan servicers or by signing up through Studentloans.gov.