Higher Education

Student loan default rates drop. Are income-driven repayment plans the reason?

A sharp drop in the number of college students who stop paying back their loans indicates that recent efforts to help students manage their debt are starting to pay off.

The U.S. Department of Education announced Wednesday that the percentage of Americans who fail to pay their federal student loans within three years of leaving college has dropped from 13.7 percent to 11.8 percent for the period ending Sept. 30, 2014.

Department officials credited the decrease to the Obama administration’s various efforts to make college affordable, including a plan that helps borrowers afford monthly loan payments by linking them to their income levels.

The Department data measures those who default on their loans within three years of graduating or dropping out of college. (Default is defined as going more than 360 days without making a payment.) The decrease in this “three-year cohort default rate” occurred across all sectors in higher education. For public institutions, the rate decreased from 12.9 percent to 11.7 percent and for private nonprofit institutions, it fell from 7.2 percent to 6.8 percent, according to the DOE press release. The default rate also dropped from 19.1 percent to 15.8 percent for private for-profit institutions, who remain the sector with the highest default rates.

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The Department uses this three-year cohort default data to penalize schools with excessively high rates. If an institution’s default rate exceeds 30 percent for three consecutive years or exceeds 40 percent for one year, it may no longer qualify for certain federal student aid programs, the main revenue source for many schools. This year, one private non-profit institution, two public community colleges and 12 for-profit schools may face penalties, unless they successfully appeal.

Secretary of Education Arne Duncan said the decrease in defaults is a sign of progress, but the number of students who default on loans is still far too high.

“We know we have a long way to go,” he said at a press conference Wednesday, calling on schools, states, loan services and especially Congress to step up.

“Congress needs to do an about face, a 180-degree turn,” he said. “They need to stop trying to undo the progress we’ve made, and instead join us in our efforts to improve student outcome and accountability in higher education.”

Some Republicans, like former House Speaker John A. Boehner, have argued that the administration should focus on helping families afford college on the front end, rather than paying back loans after debt is incurred.

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An increasing number of students are taking advantage of Obama’s initiatives and signing up for income-driven repayment plans, which determine monthly payment amounts in accordance with income level. While these plans have existed for a while, the administration has expanded them and stepped up traditional and social media campaigns to make sure students know these programs are available. Over the past year, the number of people enrolled in an income-driven plan has increased more than 50 percent, according to Duncan, to more than 3.9 million.

Some have expressed concern about income-driven repayment plans, because they can extend the term of a loan to 20 to 25 years, twice as long as the standard plan. This can lead to an increase in overall interest the borrower must pay.

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Addressing these concerns, Under Secretary Ted Mitchell said at Wednesday’s press conference that income-driven payment plans are just one tool in the loan repayment toolkit.

“Pay as you earn is not right for everybody, and that’s why we’re working with our loan servicers to help provide good advice to borrowers,” he said. “We do understand that there are borrowers who do need income-driven payment plans either for the long term of the short term. We’re very pleased to be able to make those available.”

Megan McClean, director of policy and federal relations at the National Association of Student Financial Aid Administrators (NASFAA), said that, overall, income-driven repayment plans are positive.

“Those programs are very important,” she said. “They’re there to protect students from going into default. And that’s the most important part about it because default, especially on your federal student loans, can be extremely damaging.”

But like other officials, she emphasized that much work remains to be done in making college affordable.

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Arianna Skibell

Arianna Skibell writes for The Hechinger Report. Before joining Hechinger, she covered health, education, race and criminal/social justice while earning her masters degree at Columbia… See Archive

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