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Rising Default Rates on Student Loans Stir Concerns

New data from the U.S. Department of Education show that 2008 was a bad year to graduate from college in terms of student loan defaults. According to the Education Department, 7 percent of the class of 2008 has defaulted on its federal student loans, the highest cohort default rate in more than a decade.

The cohort default rate for a particular year represents borrowers whose federally issued student loans enter default status in the first year that repayment on those loans is required.

The 2008 default rate represents a modest rise of 0.3 percent from the class of 2007’s cohort default rate of 6.7 percent but a 35-percent jump from the 2006 cohort default rate of 5.2 percent.

Students who attended a private nonprofit college or university defaulted at the lowest measured rate of 4 percent, while defaults on college loans among students who attended public institutions were at 6 percent.

But the highest rate of student loan defaults was seen at for-profit schools — an eye-popping 11.6 percent. Among those borrowers who defaulted on their student loans, the graduates of for-profit institutions represented nearly half of all student loan defaults.


For-Profit Colleges Breeding Lion’s Share of Student Loan Defaults

Under current federal regulations, the Department of Education can cut off funding of federal student financial aid for any school whose cohort default rate on student loans reaches or exceeds 25 percent for three consecutive years or whose graduates default at a rate of 40 percent or more in any one year.

Without financial aid funding, the institution would no longer be able to provide its students with federal grants or federally guaranteed student loans to help them cover tuition and other school costs. Schools that do not resolve their student loan default issues quickly will lose the ability to offer any federal financial aid, effectively closing their doors.

One student demographic that may increase the risk of student loan defaults at for-profit colleges is the lower income levels of their incoming students. Statistics from the Department of Education show that while for-profit institutions educated fewer than 10 percent of the nation’s college students in 2008–09, these students received nearly 25 percent of all federal Pell Grants and federally subsidized student loans issued during the same time period.

Pell Grants and subsidized student loans — student loans on which the government pays the interest while the student is in school — are awarded only to lower-income and financially needy students, based solely on the demonstrated financial need of the borrower.

In the estimation of the Education Department’s default-rate report, students at for-profit schools are most likely to default on their college loans because they take on too much student loan debt. Students at these schools are more likely to take on the maximum allowable student loan debt and use the money for living expenses in addition to college tuition.


New ‘Gainful Employment’ Rule Targets For-Profit Colleges

The average student loan debt for students who graduate from a for-profit college with a two-year degree is $14,000, according to figures from the Department of Education. In contrast, most community college students who seek two-year degrees graduate with no student loan debt at all.

This discrepancy leaves many education officials, including Secretary of Education Arne Duncan, with the distinct impression that for-profit colleges overcharge and underdeliver when it comes to preparing students for “gainful employment.” — jobs after graduation that will allow graduates to earn enough to manage their student loan debt and pay off their student loans on time.

Secretary Duncan said that once students graduate from a for-profit program, many of them discover that the certificate or diploma they earned doesn’t open the door to employment prospects that will enable them to repay their student loans.

Concerns about the sizable levels of student loan debt at for-profit schools, paired with the schools’ steep default rates, are, in fact, so high at the Education Department that the department has proposed a gainful employment rule that would make a school’s eligibility for federal financial aid dependent on its student loan repayment rate and the average ratio of student loan debt to earnings levels for its recent graduates.

“Far too many for-profit schools are saddling students with debt they cannot afford in exchange for degrees and certificates they cannot use,” Duncan said.

Resources:federal cohort default rates for schools, student loansHealth Fitness Articles, gainful employment rule

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Jeff Mictabor is an enthusiast on the topic of student loan issues in the news. He has been writing for the past 10 years for a variety of education publications. He now offers his writing services on a freelance basis.

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