October 7, 2008

Nat’l Student Default Loan Rate Rises

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The national student-loan default rate increased by 13 percent in 2006, leaving many concerned about the effects the current financial crisis will have on borrowers over the next two years.
The cohort default rate measured the number of borrowers who were due to enter repayment in 2006 but failed to make any payments on their loan, and defaulted after two fiscal years.
The rate, which was 4.6 percent in 2005, increased to 5.2 percent in 2006, according to a report released by the Department of Education in September.
With the meltdown of some of Wall Street’s largest investment banks and the current choked state of the credit market, the future of the student-loan default rate remains unclear.
“I think we are going to continue to see them rise for a period of time,” said Peter Olcott, the University bursar. “My sense is they will go up, because students are going to be underemployed or unemployed, and when you are in an economic situation like that, you tend to build up a lot of debt.”
Cornell has historically had a very low default rate relative to other institutions. For the 2006 fiscal year, Cornell’s cohort default rate was 0.8 percent, compared to 2.5 percent, the national average for private institutions.
Cornell only had 24 students default out of the 2,900 repayments that were scheduled to begin in 2006, a slight increase from 18 defaults in 2005.
According to Thomas Keane, director of financial aid for scholarships and policy analysis at Cornell, Cornell’s low cohort default rate can be attributed to its generous financial aid policy, which eliminates need-based loans for households with incomes under $60,000 and caps loans at $3,000 for students from families with incomes between $60,000 and $120,000.
“If we have more students with no loans in their financial aid packages, then it doesn’t matter what happens in the lending industry,” Keane said.
For students who do need to take loans to pay for tuition costs, the increase in the student-loan default rate will likely be negligible since the majority of Cornell’s loans are not privately funded.
“[Cornell] is under the government sponsored Stafford loan program called the Ford Direct Loan program, so we get our money directly from the federal government rather than through banking services. It wouldn’t affect Cornell as much as it would affect others schools,” Keane said.
The 13 percent increase that took place in 2006 is largely attributed to Hurricanes Katrina and Rita, according to the Department of Education, since both of these natural disasters virtually destroyed Louisiana’s economy. When coupled with increasing tuition rates, increasing interest rates on student loans and a general slowdown in the economy since 2006, the student-loan default rate was impacted.
Despite this increase in 2006, the current default rate is still significantly lower than historical rates. In 1990, the national student-loan default rate was 22.4 percent, and it has steadily decreased through 2002.
However, as a result of the slowing economy, default rates will likely not only increase nationally, but at Cornell as well.
“If you look at Cornell’s default rates historically, when the economy is bad, our rate goes up along with the national rate,” Olcott said. “So we anticipate that it will go up, but it is very hard to pinpoint how much and how fast.”