The U.S. Department of Education released preliminary student loan cohort default rates on Friday. And the news isn’t good–the cohort default rate rose from 7% to 8.9%, one of the biggest increases in the past decade. As the chart below shows, we’re nowhere near the all-time highs in the late 80′s/early 90′s, but this does mark four years of increases in the cohort default rate.
And as Inside Higher Ed explains, 8.9% only scratches the surface of what is really happening with student loan repayment. The ‘cohort default rate’ tracks borrowers for just two years after they enter repayment. Since it can take up to 360 days for a loan to be officially in default after the first missed payment, that means that it really only counts students who never make a payment or who stop making payments within one year of leaving school.
It also means that students who default in year three aren’t included in the cohort default rate calculation. That makes a big difference - preliminary three-year rates released earlier this year showed the default rate nearly doubled with the extra year of tracking. Adding to the bad news, a recent IHEP report showed that 15% of borrowers defaulted within five years – and those were borrowers who entered repayment in a relatively strong economy. Another 40 percent were struggling with repayment and in some form of delinquency or forbearance or deferment for financial hardship. Just imagine if we tracked cohort default rates for the full 10 years of a standard repayment schedule.
Enough with the doomsday default rates, though. Maybe it’s time to do something about this – like redesigning the loan system to better accommodate the ups and downs of the real world.