A 14% Student Loan Default Rate Isn't 'Good News'

The Department of Education just published its latest report on cohort default rates for student loans that entered repayment in 2011, which officials characterized as “good news” because the rate declined to 13.7% versus 14.7% for the prior year.

Despite what the officials say, perhaps it would be wise to keep the champagne on ice for a while longer.

The calculation behind the CDR divides the total number of students who defaulted on government loans that entered repayment in a particular year (the so-called cohort year), by the total number of borrowers who began to repay their education-related debts in the same cohort year. Colleges and universities are especially focused on this metric, not least because their access to federal grants and loans hinges upon default rates that are no more than 30% for three consecutive years or 40% in any one year.

So when the DOE announced that it was revising its calculation methodology—presumably to grant some slack for loans that ended up defaulting because the underlying borrowers had problems dealing with more than one loan-servicing company—those who’ve been demanding accountability were as disappointed and those who hoped to avoid financial Armageddon were relieved.

Even so, a 13%-plus CDR is certainly nothing to crow about.

Not only is that level of loan failure vastly worse than that of any other mainstream type of consumer borrowing—even exorbitantly priced payday loans have lower default rates—it significantly understates the problem. That’s because for government loans, a default is declared when payments are between 270 and 360 days past due. I know of no other lender on the face of the planet that would be willing to grant delinquent borrowers that much sway or, for that matter, tolerate such poor performance on the part of its loan servicing personnel.

And that’s not the half of it.

In its 2014 second quarter Report on Household Debt and Credit, the Federal Reserve Bank of New York put student loan debt at a little more than $1.1 trillion, but not all of that is due to be repaid now. According to the most recent data from the office of Federal Student Aid at the DOE, approximately $540 billion of the $1.1 trillion is currently in repayment mode—49% of the overall. Therefore, when the FRBNY reports that 10.92% of all student loans are more than 90 days past due, what it’s really saying is that twice that level are three or more months late.

Moreover, according to the same FSA data, 17% of the $300 billion of Direct Loans that are currently in repayment are between 30 and 90 days past due. Also, the FRBNY reports that new delinquencies for the total portfolio—payments that are for the first time more than 30 days late—total $27.22 billion, or an additional 5% of past-due payments.

One last metric, courtesy of the FSA: Of all the government student loan payments, less than half (42%) are being remitted in accordance with the original terms of the loan (10 years, level-payment plan). That means that 58% are being accommodated with special repayment arrangements including level payment plans that extend beyond 10 years, graduated plans where the payments start low and ramp up over time, and programs that key-off of household earnings (i.e. Income Contingent, Income Sensitive, Income Based and Pay As You Earn).

The inescapable conclusion is this: Most students who sign up for these loans have difficulty repaying their debts under the originally agreed-to terms. With that in mind, wouldn’t it make sense to bite the bullet and restructure all the loans that are currently outstanding so the money that’s already out there can find a way back?

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its affiliates.