Student Loans

Default Rates Need To Be Computed More Appropriately Gao ID: HEHS-99-135 July 28, 1999

Two major federal student loan programs--the Federal Family Education Loan Program and the William D. Ford Federal Direct Loan Program--help students meet their expenses for postsecondary education. These programs have made nearly 8.4 loans, providing students with more than $30 billion. When borrowers default on their student loans, however, it is the government that ultimately pays. An accurate measure of student loan defaults at colleges, universities, and vocational schools is an important way to monitor the financial risk facing the Department of Education. The Department now excludes schools from the program if their default rate reaches 25 percent or more for three consecutive years. This report examines the way in which the Department calculates these default rates. GAO focuses on borrowers who have temporary approval through their lenders or loan services through "deferment" or "forbearance" not to make payments on their loans. In the Department's calculation of a school's default rate, these borrowers are not counted as defaulters, but they do count as part of the total number of borrowers. This report answers the following three questions: During the last several years, has there been any increase in the number of borrowers who entered repayment but later received deferments or forebearances? What would have been the effect of the most recent default rates if borrowers whose loans were in deferment or forbearance had been excluded from the default rate calculation? Under this alternative method of calculating the default rate, would any additional schools have exceeded the 25-percent default rate threshold?

GAO noted that: (1) between 1993 and 1996, the percentage of borrowers with loans in deferment or forbearance more than doubled, from 5.2 percent of borrowers who had begun repaying to 11.3 percent; (2) this doubling was consistent across the various types of schools, including 4-year and less-than-4-year public and private schools as well as proprietary schools; (3) according to Education officials, the increase was attributable, in part, to provisions of the 1992 amendments to the Higher Education Act of 1965 that eased the requirements for obtaining deferments and forbearances as a way of helping minimize loan defaults; (4) excluding borrowers with loans in deferment or forbearance entirely from the calculation of the cohort default rate would have had the effect of increasing the overall default rate from 9.6 percent to 10.9 percent for 1996, the most recent cohort year for which data are available; (5) the proportional increases would have been roughly similar for the various types of schools; (6) for example, the rate at 4-year schools would have risen from 6.8 to 7.7 percent, while the rate at proprietary schools would have risen from 18.3 to 20.1 percent; (7) for the 1996 cohort, excluding borrowers with loans in deferment or forbearance from the calculation would have increased the number of schools with rates exceeding the 25-percent threshold by 181 schools, from 352 to 533, an increase of 51 percent; (8) under the law, these schools would have become ineligible to participate in student loan programs if their cohort default rate had exceeded the threshold for 3 consecutive years; (9) since 1991, the Department has denied participation in the programs to more than 1,000 schools because their default rates were too high; and (10) most of the additional schools that would have exceeded the threshold under the alternative calculation method were proprietary schools, but 12 were 4-year colleges and universities and 57 were public or private schools with degree programs of less than 4 years.


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