October 25, 2007

Government’s default-rate data is a view through rose-colored glasses

Posted in Student Loan News at 7:39 AM by Joe From Boston

Here’s a very interesting article pointing out the inaccuracy of the Department of Education’s published student loan default rates. You see, the Department of education only reports on defaults within 24 months of graduation. Considering it can take up to 30 years to pay back a very large consolidation, does that seem stupid to anyone else? Read the whole article at Business Week.

Finding Fault in Student Default Data

Rates of student loan default are much higher than previously reported, according to a new study. And some borrowers bear a bigger burden

Nearly 10% of student borrowers default in the first four years after they graduate, according to a new study of education loans that suggests the federal government has taken too narrow a view when measuring repayments. Moreover, the likelihood of default varies drastically across racial lines with black and Hispanic graduates far more likely to default, according to the study, Hidden Details: A Closer Look at Student Loan Default, released by Education Sector, an education policy group based in Washington.

In September, Education Secretary Margaret Spellings announced that the student loan default rate had fallen from 5.1% in 2006 to 4.6%. But the Education Dept. data cover only the first 24 months after a student graduates.

Longer Term Paints Starker Picture

The new study, released Oct. 23, analyzes data collected over 10 years by the National Center for Education Statistics (NCES) of 1993 college graduates. Instead of examining just the two-year cohort rate, published yearly by the Education Dept. which looks only at student loan default in the two years following graduation, Education Sector expands the window to reveal a starkly different picture of loan repayment.

“The problem is far bigger than the rates provided by the U.S. Department of Education suggest,” says Kevin Carey, research and policy manager for Education Sector. “And the problem is much more substantial for certain kinds of borrowers.”

Extrapolating from the NCES data, analysts found that the default rate was much higher than the Education Dept. rate, around 9.7%.

Lenders Defend Lifetime Rates

The Education department stated that the two year cohort rate is mandated by Congress and didn’t elucidate the reasons behind that choice. Student lenders such as Sallie Mae (SLM) say they largely disregard the cohort rate, and choose instead to view the business and health of student loans and student lenders based on the lifetime default rate. In 2003, the Education Dept.’s Office of the Inspector General found that the smaller two-year look at default doesn’t actually reflect long-term default trends.



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