Fewer Students Are Defaulting On Loans After Leaving College

WASHINGTON—The share of borrowers defaulting on student loans within three years of leaving college has fallen modestly, though the number remains exceptionally high despite low unemployment.

Just over 11% of the 5.2 million students who left school in the fiscal year through September 2013 have since defaulted on their federal student loans, the Education Department said in an annual report Wednesday that is closely tracked by college administrators.

Borrowers are considered in default once they have gone 360 days without making a payment after having left school, whether because they graduated or dropped out. (Payments kick in six months after borrowers leave school.)

The official default rate for the 2013 class stood at 11.3%, down from 11.8% for the 2012 class. The default rate peaked at 14.7% for the 2010 class.

The Education Department uses the figures—known as the “three-year cohort default rate”—to assess whether colleges are overcharging students. When a school has a high default rate, policy makers view it as a sign students are taking on too much debt relative to the quality of education they are receiving.

The government has the power to sanction schools that have chronically high default rates. The Education Department named 10 schools—nine for-profit colleges and one private nonprofit school—that are in danger of losing their eligibility to collect federal loans and grants from students due to high default rates. Such federal aid makes up the majority of revenue at most schools, and cutting off their eligibility would threaten their ability to remain open.

Student-loan defaults have fallen in recent years for several reasons. Many college students are finding jobs after graduation. Meanwhile, the Obama administration has promoted plans that reduce monthly payments by spreading them out over a longer repayment period and setting them as a percentage of borrowers’ incomes. Enrollment in the so-called income-driven repayment plans has surged.

The administration has also pressured colleges, particularly for-profit schools, to stop awarding loans to students who are severely unprepared for college-level work and unlikely to pay them back.

But the cohort default rate only provides a snapshot into the troubles of the student-loan program. Other figures—which take into account all borrowers, not just those who recently left school—show a large number of students are failing to send in payments on their loans. The New York Federal Reserve estimates about 1 in 5 borrowers with student loans are least 90 days behind on a payment.

[SOURCE:-The Wall Street Journal]

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