Cohort Default Rates are Going Up

Yesterday, the U.S. Department of Education released the first draft of cohort default rates for students who graduated or left school in the 2008 federal fiscal year (10/1/07 through 9/30/08). The results aren’t pretty—according to the data, 7.2 percent of borrowers defaulted within two fiscal years of entering repayment. This is an increase of 0.5 percentage points above the 2007 cohort and a jump of 2 percentage points over the 2006 set.

The chart below shows the default rates over the last three cohorts by sectors.

Borrowers from public and nonprofit institutions each had a slight increase in their default rates, but the biggest jump by far occurred at for-profit schools, which had a 0.9 percentage point gain.

The overall increased rates were to be expected given that these were borrowers who would have entered repayment during some of the worst parts of the recession, which means fewer would have found jobs and those that did would expect to earn less. And though the total rate is the highest observed since the 1998 cohort, it is still way below the historical high of 22.4 percent seen in 1990.

Part of what explains the gain in the cohort default rate is the increasing shift of the borrowing population to the f0r-profit sector. As the chart below shows, the number of borrowers in the public and nonprofit sector has actually decreased over the past three cohorts, while the number of for-profit borrowers went down from FY06-07, but then more than offset that loss from FY07-08.

The percentage of borrowers that come from the for-profit sector has increased from 21.9 percent in FY06 to 26.3 percent in FY08. Given that these borrowers default more frequently than other sectors, the relative increased representation by the for-profit sector likely contributes to the higher draft FY08 rate.

But that doesn’t mean that the number of defaulters did not increase elsewhere. The table below shows the absolute and percentage change in the number of defaulters by sector.

Every sector had more defaulters in the change from FY06 to FY07, and though the gain at for-profits was the most, the public sector was not that far behind. The change from FY07 to FY08 is a different story. Defaulters again increased in every sector, but the gains were far more pronounced in the for-profit sector. The effect of this trend is to narrow the gap between public and for-profits. In FY06, public institutions accounted for 46.3 percent of all defaulters and for-profits were 40.6 percent. In FY08, publics are 43.8 percent and for-profits are 43.3 percent. Keep in mind, though, that public institutions account for more than half of borrowers, so they are still underrepresented.

While we will have to wait a few months to see the final rates on an institutional level, the draft figures present a first glimpse. And just as for-profit schools consume the most Pell Grant dollars, so too are they beginning to make up a larger percentage of both student loan borrowers and defaulters. Given the propensity of these students to default at rates well above their peers at public and nonprofit institutions, this continued shift means the total default rate will continue rising regardless of economic conditions. If we want to avoid that, then it’s time to take a tougher look at what can be done to help these students from entering default.

Tagged as: Cohort Default Rates, Federal Student Loans, For-Profit Institutions