AP Education Writer
(AP) - After a sharp jump during the worst of the recession, new figures show the number of students defaulting on federal loans seems to be stabilizing. Students at for-profit colleges continue to have the highest default rates but the sector saw some improvement compared to last year.
The latest cohort default rates, released Friday by the Department of Education, show 13.4 percent of student borrowers whose first payments came due in fiscal 2009 had fallen behind by last September, or within three years of entering repayment. That was down slightly from a 13.8 percent trial rate calculated last year for the cohort that entered repayment in 2008.
Still, default figures are "really the tip of the iceberg when it comes to looking at borrower distress," said Debbie Cochrane, research director at The Institute for College Access and Success in California. "For every borrower that defaults on their loans there are many more in distress struggling to make repayments."
The department has traditionally measured default rates by the number of borrowers falling behind within two years of entering repayment, but is shifting to a three-year measurement to better capture the number of students who eventually can't make payments.
The latest two-year default rate rose slightly, from 8.8 to 9.1 percent, which followed a sharp jump from 7.0 percent a year ago. Those latest two-year figures translate to 375,000 of the 4.1 million students who borrowed in fiscal 2010 falling quickly into repayment problems.
The overall numbers may have been helped by new regulations and efforts to improve default rates at a number of larger for-profit chains, though students at for-profit schools remain far more likely to fall into default than their counterparts elsewhere. The latest figures show 22.7 percent of students at for-profits default within three years, though that's down from 25 percent a year ago.
The comparable three-year default figures are 11 percent at public institutions and 7.5 percent at private non-profits.
Critics contend default rates are higher at for-profit colleges because they provide poor value for money, have poor graduation rates, and have too few incentives to ensure their students succeed in the job market. Cochrane also believes for-profits are finding ways to game their default figures.
"We have to be skeptical that this reflects improvements in student outcomes," she said.
For-profit colleges say they're working to improve and argue higher default rates are to be expected because they serve lower-income students.
"Eighty-six percent of the students who attend our schools receive some form of need-based student aid," Steve Gunderson, head of the Association of Private Sector Colleges and Universities, said in a statement.
Gunderson, whose association represents for-profit colleges, called on the Department of Education to improve its loan collection programs and eliminate penalties, and called on Congress to give schools the authority to limit loans.
Member schools will continue to provide their students with financial literacy and debt repayment counseling, he said.
"It is only by the entire higher education community working together with elected officials and policy makers that we will help millions of Americans effectively manage their student loan debt," he said.
The Education Department is pushing borrowers to take advantage of income-based repayment programs, which can cap monthly payments at 15 percent of discretionary income, but which remain unknown to many borrowers.
"We continue to be concerned about default rates and want to ensure that all borrowers have the tools to manage their debt," said Secretary of Education Arne Duncan. "In addition to helping borrowers, we will also hold schools accountable for ensuring their students are not saddled with unmanageable student loan debt."
By some measurements, total student debt held by Americans has surpassed $1 trillion. Most of that comes in the form of federal loans, which have stronger borrower protections, but the figure also includes private loans. A Pew Research Center analysis released this week found a record number of U.S. households _ nearly 1 in 5 _ had some student debt, with the biggest burdens falling on the young and poor.
The federal default rate hit more than 20 percent in the early 1990s before a series of reforms in government lending drove it down to 4.6 percent in 2005. But defaults shot up rapidly following the financial crisis, rising four straight years.
Two small schools _ one in Puerto Rico and one in Virginia _ have been sanctioned for having two-year default rates of 25 percent or more for three straight years. In coming years, sanctions will be based on the three-year default rates, but not until three years of data are available. This year, there were 218 schools with three-year default rates over 30 percent, and 37 with rates exceeding 40 percent. Any school with a rate of 30 percent or higher must submit a plan to improve its numbers to the department.
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(Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.)
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