Federal Student Loan Defaults Ratchet Up

Just as the government’s grip on the lending business for higher education tightens, the Department of Education is reporting that defaults on taxpayer-backed student loans surged in 2007 at the very beginning of the credit crisis, suggesting that more losses are baked in.

The national student loan default rate increased to 6.7% in 2007, up from the 2006 rate of 5.2%, the agency reported Monday. "The economic downturn likely had a significant impact on the borrowers captured in these rates," U.S. Secretary of Education Arne Duncan said. "The Department is reaching out to make sure current and prospective student borrowers are aware of the many flexible repayment options designed to assist them with their financial obligations, such as the new Income-Based Repayment Plan."

This dated loan performance information doesn’t bode well for taxpayers. Despite pullbacks in lending and borrowing by consumers, the amount of government-backed student loans originated as of early August surpassed the full-year total for 2007-2008 school year by 21% at a record $95 billion. (See "Uncle Sam Saves College.")

The default percentage is based on the 225,300 borrowers who defaulted between Oct. 1, 2006, and Sept. 30, 2007, on their first payment out of the 3.3 million who entered repayment during that window. The data has a major delay because the department collects draft rates from schools the spring following the year in question and releases the rate the following September, amounting to a 24-month lag between when the defaults first occur and when they are reported.

The Federal Family Education Loan Program was 7.2%, a 36% increase over the 2006 rate of 5.3%. The 2007 rate for schools participating in the Direct Loan Program was 4.8%, a 2% increase over the 2006 rate of 4.7%.

This isn’t the first time that the government loan program was seen defaults ratchet up. In 1990, nearly one in four borrowers defaulted on their federal loans. In 2003, the rate fell to record low of 4.5%.


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