The national student loan default rate is one of the most closely watched metrics in higher education because it is used to determine whether colleges are eligible to receive federal student aid. The department can impose sanctions on schools with default rates above 30 percent for three consecutive years, or 40 percent for a single year.
This year, seven for-profit schools, two public colleges and one private university 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 and receive federal grants.
Culpeper Cosmetology Training Center in Culpeper, Va., is the only school near the Washington area under threat of losing access to the federal student aid program. Taken as a whole, colleges in Virginia, Maryland and the District have borrower default rates hovering around 10 percent, according to the department.
The default rate at public colleges, which educate a majority of students, held steady at 11.3 percent. At private nonprofit colleges, the default rate edged higher from 7 percent to 7.4 percent. For-profit colleges, which historically have had some of the highest levels of defaults, posted a 15.5 percent rate, up from 15 percent.
Despite the significance of the so-called cohort default rate to colleges, the numbers only capture a slice of total defaults on federal student loans. A more comprehensive look at the government’s portfolio reveals that millions of people had not made a payment on about $144 billion in federal student loans for at least nine months as of June, a 12 percent increase in defaults from a year earlier.
Nearly half of the outstanding debt in default comes from the old bank-based federal lending program, known as the Federal Family Education Loan (FFEL) Program. There has been a fairly steady increase in the total amount of past-due debt in the program, even as the number of borrowers has declined, suggesting that interest charges and other fees are being tacked on to balances.
What’s more, the share of people defaulting for the second time has climbed this year, a sign to some consumer groups that the contractors the government hires to service student loans are falling short on keeping borrowers current on their loans.
Student loan servicers, the middlemen who handle debt payments, have argued that some borrowers are simply unresponsive to calls, letters and emails to keep them from falling behind. Yet a series of reports from the Consumer Financial Protection Bureau have accused servicers of creating obstacles to repayment and driving borrowers into default with sloppy collection and application of payments. People have complained to the bureau of servicers losing paperwork, processing payments too slowly or sending inaccurate billing statements.
Borrower complaints and the stubbornly high default rates pushed the Obama administration to issue a set of contract requirements to improve the quality of servicing. One directive called on the Office of Federal Student Aid to hold companies accountable for borrowers receiving accurate, consistent and timely information about their debt. Another 56-page memo called for the creation of financial incentives for targeted outreach to people at great risk of defaulting on their loans, among other things. Servicers complained that the demands would be expensive and unnecessarily time consuming.
Education Secretary Betsy DeVos capitulated by withdrawing all of those Obama-era policy memos in April. Her decision was met with swift resistance from student advocates who accused the secretary of kowtowing to the department’s contractors. DeVos defended her call by saying the policies were far too complex and costly.
But in light of the new default numbers, advocacy groups say those consumer protection are needed now more than ever.
“Now is the time to be improving student loan policies and increasing oversight and accountability,” said Pauline Abernathy, executive vice president of the Institute for College Access & Success. “But the department is doing the opposite. The rollback of critical protections and enforcement will only lead to more student loan defaults, higher debt burdens, and wasted taxpayer dollars.”