The percentage of borrowers who default on their student loans shortly after leaving college has fallen, and not because they are having an easier time finding good paying jobs. The primarily reason is that more borrowers are taking advantage of a generous repayment program offered by the federal government.
The U.S. Department of Education said today that the official three-year federal student loan cohort default rate has declined to 11.8% for students who entered repayment in fiscal year 2012. In other words, 11.8% of borrowers who left school between Oct. 1 2011 and Sept. 30 2012 defaulted before Sept. 30, 2014.
While that’s high by historical standards, it is down from 13.7% in fiscal year 2011.
That drop was across all sectors of higher education—public, private and for-profit institutions. For-profit schools continued to have the highest rate of default, at 15.8%. The rate was 11.7% for public institutions and 6.8% for private nonprofit schools.
The cohort default rate is one of the Department's tools for preventing lowest performing schools from receiving student aid. This year, two public community colleges, one private nonprofit school and 12 for-profit schools face loss of eligibility unless they submit successful appeals.
The Education Department also said recent data indicate increasing numbers of student loan borrowers are taking advantage of income-driven repayment plans. More than 3.9 million Direct Loan borrowers are currently enrolled, and this is up more than 50% over the past year in income-driven repayment plans. The government does not collect data on enrollment by borrowers with Federal Family Education Loans. The FFEL program was discontinued in 2010.
This increase is the result of heavy marketing by the Education Department directly to borrowers as well as efforts to encourage servicers to enroll borrowers in the plan. The department said servicers are servicers now enrolling more than 5,000 borrowers in income-driven plans daily.
While that’s good news for borrowers who would struggle to make payments otherwise, it’s bad news for investors in bonds backed by FFELP loans. As more borrowers enter these programs, the overall rate of repayment on loans backing FFELP securitizations is falling. Moody’s Investors Service and Fitch Ratings have put some $37 billion of FFELP ABS under review for downgrades on concerns that the bonds may not pay off by their final maturity.
Concerns that these bonds, now rated triple-A, could be cut to junk prompted a widespread selloff over the summer.