Today the U.S. Department of Education revealed that the number of students defaulting on their student loans has continued to decline, to 11.8% this year from 13.7% last year, and 14.7% the year before that. That’s 11.8% of students whose loans entered repayment in 2012.
“The Obama Administration has taken historical steps to give borrowers more options to manage their student debt and stay on track to repayment and to hold institutions accountable for improving student outcomes,” said Secretary of Education Arne Duncan in the press release.
The smaller numbers appear to be at least partly because borrowers are taking advantage of friendlier repayment options. Enrollment in income-driven repayment plans, for instance, have jumped more than 50% over the past year and are at an all-time high, according to the Department of Education.
IDR plans cap your monthly payments based on what would be considered affordable for your income and family size.
“We’re very encouraged to see the rate has lowered for the second year in a row,” says Megan McClean, managing director of policy and federal relations for the National Association of Student Financial Aid Administrators. “Outreach campaigns have really done a good job of getting to students and delivering the message that there are options available to students if they feel that they can’t make their monthly payment.”
McClean went on to say that schools are also doing a better job of making sure that students know what they’re getting into, loan-wise. “There’s been a lot of effort over the last couple of years to strengthen consumer information for students and families,” she says.
However, this is still an industry with some issues. Consider that the Consumer Financial Protection Bureau found “widespread servicing failures” by both private and federal student-loan servicers in a recent report.
“The student loan market continues to show elevated levels of distress relative to other types of consumer debt,” the report says. “The Bureau estimates that more than 1-in-4 student loan borrowers are now delinquent or in default on a student loan.”
Institutions with a default rate that is equal to or greater than 30 percent must create a default prevention task force to track down the problem, according to the Higher Education Opportunity Act of 2008. And schools with high default rates could lose eligibility to take part in one or more federal student aid programs.
This year, that list includes two public community colleges, one private non-profit school, and 12 for-profit schools:
- 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)
In the meantime, Mark Kantrowitz, senior vice president and publisher of Edvisors.com, points to a college education as the best hedge against unemployment, and hence student loan default. “Students who drop out of college are four times more likely to default than students who graduate, accounting for 63% of defaults,” Kantrowitz says. “It is not so much the amount of debt that drives defaults, but rather the ratio of debt to income or the percentage of income…that must be devoted to repaying student loans.”
