The U.S. Department of Education (DOE) has released its official 2010 two-year and official 2009 three-year federal student loan cohort default rates, a DBRS report cited this morning.

The national two-year default rate went up to 9.1% for the most recent cohort, increasing from 8.8% for the 2009 cohort.

In terms of the type of institution, the two-year cohort default rate rose for both public and private non-profit schools, rising from to 8.3% from 7.2% for public institutions and to 5.2% from 4.6% for private non-profit institutions, the rating agency noted. The two-year cohort default rate improved for for-profit institutions to 12.9% from 15%.

DBRS said that this is the first year that the DOE has issued an official three-year cohort default rate that was 13.4% for the most recent cohort. This is a dip from a trial three-year 13.8% rate calculated last year for the cohort that started repayment in 2008, DBRS reported

In terms of the type of institution, the three-year cohort default rates for non-profit schools reached 11% for public and 7.5% for private, with the three-year cohort default rate for for-profit institutions at 22.7%.

After rising rapidly during the financial crisis, the new default data imply that performance seems to be moderating as proven by the comparatively smaller rise in the overall two-year default rate versus recent years, the drop in the overall three-year default rate, and the considerable improvement in the for-profit institution two-year default rate.  

But, overall student loan default rates are still well over historical averages and should stay high until there is a sizable improvement in macroeconomic conditions, notably the rate of unemployment, which is a main student loan performance driver.

The two-year default rates represent the borrower cohort whose loans entered repayment between October 1, 2009, and September 30, 2010. These are also the borrowers who defaulted prior to September 30, 2011. The three-year default rates represent the cohort of borrowers whose loans entered repayment between October 1, 2008, and September 30, 2009 and who defaulted prior to September 30, 2011, DBRS reported.

According to the rating agency, the DOE has always measured default rates by the number of borrowers falling behind within two years of entering repayment, but is in the process of moving to a three-year rate. This is required by the Higher Education Opportunity Act of 2008, to capture a more accurate picture of how many borrowers eventually default, the rating agency explained.

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