New Analysis of Student Loan Repayment Rates

A large percentage of borrowers who left college in the past four years made no principal payments on their federally guaranteed student loans in 2009, according to the Department of Education.

This is the first time the department has calculated and published repayment rates for every college and university whose students get federal loans.

The data, released Aug. 13, should be a wake-up call to taxpayers, who will be on the hook if these loans are never repaid, and to students who wonder whether they’ll earn enough to repay them.

Repayment rates vary widely from college to college. They can be found at http://links.sfgate.com/ZKES.

Prospective students who need to borrow for college should take the data into consideration before choosing a school, but it’s important to understand them.

"This is one more piece of the puzzle that students and families can use to help them figure out which is the right college for them. It’s not the most critical piece," says Debbie Cochrane, program director at the Institute for College Access and Success.

To determine repayment rates, the department looked at students who graduated or left college in the past four years with federally guaranteed student loans, then looked at the percentage of them who made at least $1 in principal payments in the past year. It weighted this percentage by the dollar amount of the loans.

Based on this measure, only 51 percent of loans are in repayment.

That means 49 percent "are not currently in repayment," but it doesn’t mean those loans will never be repaid, says Mark Kantrowitz of FinAid.com.

The 49 percent includes borrowers with financial problems who are in approved forbearance or deferment programs that allow them to postpone payments. It also includes students who are in programs that allow them to pay interest, but no principal, on their loans. But it also includes students who are simply not paying their loans.

The Education Department came up with repayment rates as part of its new rules for for-profit colleges.

Federal law requires for-profit schools that receive federal student aid to prepare students for "gainful employment," but that term was never defined.

Concerned that too many students are graduating from these schools with debt they could not repay, the department decided to write new rules for for-profit colleges. In late July, it proposed rules that define gainful employment based on their former students’ debt-to-income ratios and student loan repayment rates. If a for-profit school exceeds certain limits, its new students would not have access to federal aid.

Although the repayment data are new, this isn’t the first time the department has attempted to quantify default rates. However, critics say the old way of calculating the rates covered too short a time period and was too easy for colleges to manipulate.

So it came up with a different way of measuring former students’ ability to repay their loans. The two rates are calculated differently and present a very different picture.

For example, UC Berkeley’s default rate was 0.9 percent for 2007, the latest year available.

In the newly published data, its repayment rate for 2009 was 73 percent, which implies that 27 percent of loans were not in repayment.

Berkeley’s repayment rate is actually pretty good. The average repayment rate is 53.7 percent for all public colleges, 56 percent for private, nonprofit colleges and 36.4 percent at for-profit colleges, Kantrowitz says.

He warns that because the report is so new, there could be errors. Some schools have disputed the government data.

In some cases, the data are misleading. For example, Harvard Medical School’s repayment rate is only 24 percent, but medical school graduates typically postpone student loan payments while they are interns or residents. Harvard University’s repayment rate is 84 percent.

Under the department’s proposed rules, a for-profit school could lose eligibility for financial aid if its repayment rate on federal student loans is less than 35 percent and its former students are spending more than 12 percent of their income and more than 30 percent of discretionary income to repay all college loans. (These rules also would apply to nondegree programs of less than two years at public and private nonprofit schools.)

Unless it’s a medical school, Kantrowitz says, he would be worried if a college’s repayment rate was below 25 percent.

He has encouraged the Education Department to put the new data in a user-friendly format, such as on the College Navigator website, where consumers can find a wide range of information on individual schools.

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