Borrowers of federal student loans defaulting at higher rate

We already knew that college graduates are facing more debt now than ever before, but a new report from the U.S. Department of Education breaks down the harsh reality.

People who borrowed using federal student loans had an 8.8 percent default rate in the 2009 fiscal year, according to the report. That’s an increase compared with 7 percent the year before.

The most significant increase was from borrowers who attended for-profit schools. They defaulted at a rate of 15 percent, up from 11.6 percent the year before:

The rates announced today represent a snapshot in time, with the FY 2009 cohort consisting of borrowers whose first loan repayments came due between Oct. 1, 2008, and Sept. 30, 2009, and who defaulted before Sept. 30, 2010. More than 3.6 million borrowers from 5,900 schools entered repayment during this window of time, and more than 320,000 defaulted. Those borrowers who defaulted after the two-year period are not counted as defaulters in this data set.

Schools that have excessive default rates could even lose eligibility for federal student aid programs. Tidewater Technical in Norfolk, Trend Barber College in Houston, Missouri School of Barbering & Hairstyling in St. Louis, Sebring Career School in Houston, and Human Resource Development & Employment – Stanley Technical Institute in Clarksburg are all subject to sanctions. These schools each had cohort rates that either exceeded 25 percent for three consecutive years, exceeded 40 percent in the latest year, or both.

“These hard economic times have made it even more difficult for student borrowers to repay their loans, and that’s why implementing education reforms and protecting the maximum Pell grant is more important than ever,” said U.S. Secretary of Education Arne Duncan.

There are some glimmers of hope, however. Some students might find respite in the form of the income-based repayment plan (IBR). Monthly loan payments are capped based on income and family size.

Officials from the U.S. Department of Education also say they are taking further steps to protect students from the risk of defaulting:

Through a series of regulations finalized over the past year, the Department has tightened loopholes to protect students from misleading or overly aggressive recruiting practices; taken action to ensure that institutions are offering high-quality programs; and established rules that require career college programs to better prepare students for gainful employment or risk losing access to federal student aid.