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Undercount of Student Loan Default Rates

posted by Bob Lawless

From Kelly Field in today's Chronicle of Higher Education:

According to unpublished data obtained by The Chronicle, one in every five government loans that entered repayment in 1995 has gone into default. The default rate is higher for loans made to students from two-year colleges, and higher still, reaching 40 percent, for those who attended for-profit institutions.

These numbers are much higher than the official government statistics that track student-loan defaults only in the first two years of payment. The default rates become very high over a 15-year window. For example, over a 15-year window, the default rate is 31% for loans made to community-college students. I highly recommend reading the full article, which provides much more detail and an extended discussion of default rates at for-profit colleges.


Are student loan contracts subject to state statute of limitations? I wonder because they're not dischargeable in bankruptcy, so I wonder if there are other protections. Sallie Mae (SM) is quasi-federal; could SM take advantage of Treasury's offset program? But maybe not because SM simply facilitates loans, while private banks actually do the actual lending.

As a companion, I highly recommend "College, Inc." from PBS' Frontline series:


It goes into the details around for-profit universities, default rates, and the astounding amounts of money students are borrowing--intentionally or otherwise--to fund educations that often turn out to be substandard.

Sidenote: The link in question appears to go to an access portal at UI Urbana. A generic link would be: http://chronicle.com/article/Many-More-Students-Are/66223/

The link above requires a login but I found the story at


Thanks for pointing out the article.

Susannah, many thanks. I thought I had navigated the gated/ungated distinction at The Chronicle but apparently not. I've fixed the link in the main post (I hope -- it's hard for me to tell from present location).

Ah, the article answers my question - Treasury offset. Thanks for the link Susannah!

Wow, it's nice article, really informative, hope you have another article about Student Loan , oh yeah I have similiar blog with you, hope you can visit my blog on http://top-studentloans.blogspot.com/ and we can share each other.

Based on Inspector General Data initially reported on by Nick Perry of the Seattle Times, and in view of recent 5 year default data, We feel confident that the true default rate across all federal student loans is between 25 and 33 percent- clearly higher than asserted in the Chronicle article, and certainly worthy of continued press inquiry.

Also, we ask the media community to consider the facts in an objective manner, and consider whether it is appropriate to focus solely on the for profit colleges. We feel that it clearly is not. The default rate for community colleges and, yes, four-year institutions are also astonishingly high. This problem is not unique to for profit colleges, it is a systemic, predatory, parasitic lending system generally, and should be acknowledged as such.

Importantly, This problem also transcends the lending system type (FFEL/Direct). In fact the motivation to default loans may be exacerbated under the Direct system, but this is only conjecture at this point that cries out for further media scrutiny.

The American Public was, for decades, exposed to consistent, repeated claims by the universities, student loan companies, and the Department of Education that the default rate was low (between roughly 4 and 7 percent) during the same time period. The fact that the the true default rate was as high or higher than the subprime home mortgage default rate is currently, higher than credit card default rates, payday loans, etc. is information that would have saved the American public hugely, both in real dollars, and other types of damages. Our organization spent two years attempting to convince the higher education media community to cover this this issue. That it took this long is, in itself, a disturbing commentary on the priorities of the media over the past two years

While our conclusions differ somewhat from those that the Chronicle arrived at, we think the Chronicle deserves the highest and best commendation from us, from the borrowers, and most importantly, from the future students (and their families) who otherwise would have been led into borrowing decisions woefully misinformed about the true risk of these federal loans.

We look forward to supporting any and all investigative efforts that arise from this seminal article. The American public deserves to know the true impact of removing standard consumer protections from student loans, and we believe will be very glad to have been presented with the truth, as ugly as it may turn out to be. It is only after understanding the problem without exaggeration or diminution that a suitable solution can be determined and achieved.

Default rates are 10 to 15 percent over the long-term. In the short-term and in the long-term they are much lower than sub-prime mortgages and are actually lower than some subcategories of prime mortgages. Taken in perspective, this is an amazing track record for completely-unsecured loans issued to all eligible applicants, regardless of bad credit or no credit.

Some of the "worst sub-sub-categories are 30 to 40 percent, but, as you know, if these categories only represent 5 percent of the loans, they do not have a strong influence on the nationwide overall rates. It does make one wonder why DoEd does not do more to investigate those those schools and lenders.

The 1995 repayment year “selected” by the Chronicle was a particularly bad one, impacted by both the high-risk SLS loans issued by thousands of now-defunct trade schools and DoEd's inept introduction of default consolidations that year.

Many, if not most, defaulted borrowers make some effort to clear their debts. None of these efforts are reflected in the Chronicle's data, which instead counts any loan that has ever defaulted as defaulted forever. For example, if a borrower inherited a boodle from Aunt Mame the month after the default and paid off five defaulted loans, then those five loans would still be counted as defaults forever, because it is a "default rate." 15 to 30 percent of defaulted loans (depending on grouping) rehabilitate. Some borrowers make regular payments but do not rehabilitate. As some readers have noted, many loans are collected through tax refund offset, wage garnishment, etc.

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