Politics & Government

Student loan defaults drop slightly, but still high

The default rate on federal student loans is 13.7 percent, according to the latest data, released on Wednesday. That’s down slightly from a year ago, when it was 14.7 percent.

Education Secretary said while the drop is good news, the default rate is “still too high.”

Federal student loans make up the vast majority of the student loan market. Compared to private student loans, the federal loans offer more protection for borrowers. For example, unlike private loans, federal loans in many cases allow borrowers to temporarily postpone or lower payments if they run into trouble. (For a side-by-side comparion from the government is here.) Most federal student loans also don’t require a credit check.

The Consumer Bankers Association, an industry trade association of retail banks, said tougher rules would lower defaults.

“It is clear from its abysmal 13.7 percent default rate the federal government has much to learn from the private student lending market, which has a default rate of less than 3 percent,” CBA president and CEO Richard Hunt said in a statement. “It is a disservice to taxpayers who are ultimately responsible for these loans _ and even more so to the students whose ability to repay the loan is not a consideration in the federal aid approval process. Strong underwriting standards, and the verification of a student’s ability to repay, is the most responsible way to ensure students begin their education on sound footing.”

The Department of Education is working to make better information available and set up more flexible repayment options. For example, it has set up 30-minute online student loan counseling. There’s also a government website with financial aid information, StudentAid.gov. One section on the site points out how severe the consequences of defaulting on a student loan can be: The entire unpaid balance and interest becomes immediately due; the borrower loses eligibility for easier repayment plans; and the loan is assigned to a collection agency, which will damage the borrower’s credit rating.

The federal government plans to let student loan borrowers cap their monthly repayment at 10 percent of their monthly income, starting next year. Many borrowers already take advantage of existing income-based repayment plans.

The 13.7 percent default rate is based on the number of borrowers who started repayment of their loans between Oct. 1, 2010, and Sept. 30, 2011, and who defaulted before Sept. 30, 2013.

The default rate was highest at for-profit institutions, where it was 19.1 percent, down from 21.8 percent a year earlier.

At public institutions the default rate decreased very slightly, from 13 percent to 12.9 percent. At private non-profit institutions it was down from 8.2 percent to 7.2 percent.