World and Nation

Default rates for federal student loans rise sharply

The share of federal student loan defaults rose sharply last year, especially at for-profit schools, where 15 percent of borrowers defaulted in the first two years of repayment, up from 11.6 percent the previous year.

According to Department of Education data released Monday, 8.8 percent of borrowers overall defaulted in the fiscal year that ended Sept. 30, the latest figures available, up from 7 percent the previous year.

At public institutions, the rate was 7.2 percent, up from 6 percent, and at not-for-profit private institutions, it was 4.6 percent, up from 4 percent.

“Borrowers are struggling in this economy,” said James Kvaal, deputy undersecretary of education. “We see a strong relationship between student default rates and unemployment rates.”

Although the new overall rates are the highest since 1997, when they were also 8.8 percent, default rates peaked in 1990 at more than 20 percent.

The new rates represent a snapshot in time, covering the 3.6 million borrowers whose first loan payments came due between Oct. 1, 2008, and Sept. 30, 2009, and who defaulted before Sept. 30, 2010. More than 320,000 of those borrowers defaulted during that period.

Although for-profit colleges, which typically serve low-income students, enroll only about 10 percent of the nation’s undergraduates, Kvaal said, their students made up 150,000, or almost half, of the defaults.

The high default rate at for-profit colleges, the fastest-growing sector of higher education, has become an increasing concern for the government, since such schools depend on federal student aid for more than 80 percent of their revenues. In part because of the high default rates at the for-profit colleges, the department recently adopted regulations designed to curb recruiting abuses and cut off eligibility for federal aid at programs that leave students with high debt loads and poor job prospects.

Student borrowing has been increasing in recent years, as tuition has grown faster than inflation or family income. And with the recession, and high unemployment rates for young workers, default rates may continue to rise for some years. Borrowers who default can face a lifetime of consequences, including inability to borrow for a car or a house, wage garnishment, seizure of tax refunds, or even, in an era when employers increasingly check credit reports, difficulty in getting a job.