The number of people who fail to pay their federal student loans within three years of leaving college is down, signaling that the government’s generous repayment plans are taking off. About 11.8 percent of borrowers who began repayment Oct. 1, 2011, defaulted by Sept. 30, 2014, down from 13.7 percent the year before, the Department of Education said Wednesday.

The Obama administration has stepped up efforts to get people enrolled in repayment plans that cap their monthly payments to a percentage of their earnings to help them avoid defaults. Use of those income-driven plans has gone up 56 percent since last year, with 3.9 million borrowers enrolled. Still, a recent spate of studies suggests that more could be done to make borrowers who are struggling aware of the plans. And consumer advocates worry that too many of those enrolled are falling out of the program.

The decline in the number of people at least nine months behind on their federal loans is nevertheless encouraging as it occurred across all sectors of higher education. For-profit colleges witnessed the biggest change as default rates fell from 19.1 percent to 15.8 percent, though the sector still has the highest three-year rate. Defaults slid from 12.9 percent to 11.7 percent at public universities, and 7.2 percent to 6.8 percent at private schools, the department said.

“We are seeing real progress in helping students manage their debt,” said Education Secretary Arne Duncan on a call with reporters. “Although the reduction is welcomed, we know we have a long way to go to ensure that students and taxpayers do not bear the cost and the consequences of default.”

The so-called cohort default rate captures whether students are severely behind on their loans, but not whether they are struggling to make payments. There are nearly 3 million people with federal student loans in some stage of delinquency, according to the Education Department.

Critics have long worried that schools can game default rates by encouraging students suffering financial hardship to postpone payments through deferment or forbearance. Even the Education Department said the default rate was susceptible to “gaming behavior” by schools in a report on its College Scorecard.

“We do recognize that on the margins there is that potential,” said Education Undersecretary Ted Mitchell, on the call.

Ultimately, the cohort default rate is used to determine whether colleges are eligible to receive federal student aid. The department can impose sanctions on colleges with default rates above 30 percent for three consecutive years, or 40 percent for a year.

This year, two public community colleges, one private university and 12 for-profit schools hit those thresholds. The colleges, most of which are cosmetology or barber schools, must all appeal to the department if they want students to be able to take out federal loans.

These schools are subject to loss of eligibility sanctions:
Umpqua Community College (OR)
Eastern West Virginia Community & Technical College
Ohio State College of Barber Styling (OH)
Guti, the Premier Beauty and Wellness Academy (FL)
Capstone College (CA)
L T International Beauty School (PA)
Florida Barber Academy (FL)
Jay’s Technical Institute (TX)
Memphis Institute of Barbering (TN)
Northwest Career College (NV)
Northwest Regional Technology Institute (PA)
Coast Career Institute (CA)
San Diego College (CA)
Profile Institute of Barber-Styling (GA)
United Tribes Technical College (ND)

While those schools were the most severe cases, there were 94 colleges with default rates of 30 percent or higher, down from 141 last year.

“We’re going to keep working to hold schools accountable, help students make informed decisions before enrolling and help borrowers understand their repayment options,” Duncan said. “Servicers must do more too as they play a critical role in reducing borrower default.”

A report released Tuesday by the Consumer Financial Protection Bureau accused student loan servicers of creating obstacles to repayment, raising costs and driving borrowers into default with sloppy collection and application of payments. People told the bureau that servicers were losing paperwork, processing payments too slowly or sending inaccurate billing statements.

The bureau estimates that at least one in four people with federal and private student loans are delinquent or in default, an indication that servicers are not doing enough to make people aware of their options to stay current. Another report from the Government Accountability Office found that 70 percent of the people who defaulted on their loans could have qualified for an income-driven plan had they known about them.

As President Obama directed this year, the department is working with the Treasury Department and CFPB to clean up servicing. To that end, the agencies released a joint set of principles Tuesday as a framework for reforms, including making sure borrowers have access to the information they need to repay their loans.

The government’s flexible repayment plans are critical as student debt tops $1.3 trillion and people struggle to find jobs that pay enough to cover their monthly loan payments. Plans vary based on the type of federal loan, and only loans provided by the government are eligible.

One of the most widely available plans is what’s known as the income-based repayment (IBR) program, which covers new and older loans. It caps payments to about 15 percent of your income and forgives any balance that exists after 25 years. The calculation is based on your discretionary income, or whatever you earn above 150 percent of the federal poverty line ($17,505 for a single person).

“With all the administration has done to allow borrowers to cap their monthly payments based on their income, there is no real reason why we can’t continue to significantly reduce the default rate,” Duncan said.

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