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NYC Consumer Debt Defense Project

A Big Default Problem, but How Big?

Saturday, September 08, 2012

he Department of Education plans to release its official default rate in the next few weeks. Prepare to be underwhelmed.

Neither the department nor Congress talk much about a student loan default problem. One reason is the government’s official measure plays down the numbers.

The department’s official default rate measures only borrowers who have defaulted within two years of beginning to repay their loans. By that measure, which was established by Congress, the most recent default rate — for borrowers entering repayment in fiscal year 2009 — was 8.8 percent, up from 7 percent the previous fiscal year.

But the average time for a borrower to default is four years, not two, according to the Department of Education. So many defaulters are going uncounted.

To address that problem, Congress is extending the official default rate to measure the first three years of repayment. But the new rate still won’t capture the full range of defaults — or the growing number of people veering toward default.

Last year, a study by the Institute for Higher Education Policy found that for every borrower who defaulted, at least two more borrowers were delinquent in their payments. And in March, the Federal Reserve Bank of New York, using a survey of credit reports, concluded that more than one in four borrowers of student loans, both federal and private loans, were behind on their payments.

Long-range projections by the Department of Education estimate that the default rate over 20 years, for borrowers who began repayment in 2009, is 17 percent; among students who attended profit-making colleges, the predicted default rate is 49 percent.

It is messy, though, to compare those long-range estimates with the official default rate published by the Department of Education. The long-range estimates are calculated on the dollar amount of loans in default, while the official rate is based on the number of borrowers in default.

Looking at defaults another way, about 15 percent of all borrowers have been in default at the end of the last six fiscal years, which ends Sept. 30, according to Department of Education data. Currently, 16 percent of borrowers are in default, nearly twice the official default rate.

Stephen Burd, senior policy analyst with the New America Foundation’s Education Policy Program, called the official default rate “an extremely flawed measure.”

“For years, Democratic and Republican administrations alike touted ‘record low’ rates to boast of their skill in managing the federal student aid programs, when in fact these numbers reflected only a fraction of the loans that would eventually go bad,” Mr. Burd wrote in an e-mail.

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