Publication Date: September 19, 2001

Author: ODAS | Office of the Deputy Assistant Secretary

Summary: ACCOUNTABILITY FOR RESULTS WORKS: COLLEGE LOAN DEFAULT RATES CONTINUE TO DECLINE

UNITED STATES
DEPARTMENT OF EDUCATION

NEWS

ACCOUNTABILITY FOR RESULTS WORKS: COLLEGE LOAN DEFAULT RATES
CONTINUE TO DECLINE

U.S. Secretary of Education Rod Paige today announced that the national cohort default rate has fallen to the lowest rate ever -- 5.6 percent for FY99 -- and credited the colleges and universities that have worked diligently to reduce default rates at their institutions.

To illustrate the positive impact of increased accountability, Paige announced that, for the first time, all 101 Historically Black Colleges and Universities (HBCUs) have lowered their default rates sufficiently to keep them off the department's "watch list." By lowering default rates among their students, the colleges will maintain their eligibility for financial assistance, making it possible for the department to continue to offer federal student aid funds to their students.

"This year's rates show that accountability for results works," Paige said. "The low national default rate reflects a concerted effort by schools and colleges to increase borrower awareness of their repayment obligations, track borrower delinquencies, and counsel borrowers who get behind in their payments."

Underscoring the importance of sustaining the efforts underway at colleges and universities, Paige noted that while rates have gone down, due to a number of factors, student loan default costs have more than doubled over the last eight years. The total amount outstanding from defaulted student loans has increased during that period from $12 billion to $25 billion. He emphasized his commitment to increasing collections on defaulted student loans and reducing total default costs to the taxpayer: "If colleges are to be held accountable, the department must also be fully engaged in this effort. We will use every tool available to collect the loans that are currently in default, get these borrowers back on track, and help current borrowers avoid default altogether."

He cited a number of activities that are underway and working to reduce default costs.
For example:

• capture of income tax rebate checks, wage garnishments, legal proceedings, and other collection tools have recouped over $2.5 billion in FY 2001;

• the department's new data match with the Department of Health and Human Services National Directory of New Hires, a database of all persons employed in the US, has proven to be a successful new tool for collection and has already resulted in an additional $130 million collected in FY 2001 from defaulted borrowers;

• the efforts by the secretary's team to improve the management of the student financial assistance programs so that the programs are removed from the US General Accounting Office's government-wide list of "high-risk" programs;

• private lenders and state guaranty agencies have set up programs, such as debt management, financial counseling and flexible repayment plans, that provide assistance to "at-risk" borrowers to prevent default, preventing more than $10 billion from going into default in FY2000;
• flexible repayment options, such as graduated and income-sensitive repayment plans, were enacted by Congress for all Federal loan programs in the Higher Education Amendments of 1998;

• the department recently held Default Prevention Day symposiums in cities across the country to help more than 500 colleges develop successful default management programs and share practices that have proven effective in reducing the default rate; and,

• the Student Loan Repayment Symposium brought together industry experts to share best practices for improving student repayment and identifying potential problems with financial aid administrators.

By the end of FY 2001 on Sept. 30, approximately 5.26 million students will have borrowed $33.9 billion in federal student loans, more than triple the $11.7 billion borrowed in FY 1990. Paige noted that the Bush Administration's proposed budget includes a number of proposals to increase access to a quality education after high school and make it more affordable:

• interest deductibility for student loan payments until loans are repaid entirely instead of the first 60 months;

• expansion of state tax-free savings plans and increase in the amount that can be invested in tax-free Education Savings Accounts to $2,000 per year; and

• providing additional tax relief to families with a rebate check that can be used to pay for books and tuition.

"Accountability also means keeping college costs down," Paige said, "continued tuition increases are leading to higher levels of student debt and hinder our efforts to keep down default costs and to make college more affordable."

Schools with excessive default rates are held accountable for the default rates of their students. Schools with default rates of 25 percent or greater for three consecutive years, or greater than 40 percent for one year, face loss of eligibility to participate in the loan and/or Pell grant programs. They have appeal rights and retain eligibility while an appeal is pending.

As a result of the department's Default Management Initiative, sanctions were imposed for the first time with the release of the FY 1989 rates in 1991. Since then, more than 1100 schools have lost student loan program eligibility. This year, seven schools are faced with loss of loan eligibility and two of these schools may also lose Pell grant eligibility.

Paige encouraged borrowers who believe they may be in default on a federal student loan to contact the holder of the loan immediately for more information about available repayment options. "Every day brings the opportunity to make a new start," Paige said. "Our main goal is to help borrowers live up to their obligations to repay their loans so we can continue to provide the maximum level of assistance to the students of tomorrow."
Borrowers who need help locating past due accounts may call the department's Debt Collections Service Center at 1-800-621-3115.

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NOTE TO EDITORS: Individual school default rates are posted on the department's web site at: http://www.ed.gov/offices/OSFAP/defaultmanagement/cdr.html

NOTE TO EDITORS: Deputy Secretary Hansen will hold a telephone conference call with reporters at noon (EDT) today to discuss the new default rates. Reporters should dial in to a toll-free number: 1-800-589-4298. The conference call will begin promptly at noon. Reporters are encouraged to dial in at least 10 minutes in advance.

STUDENT LOAN DEFAULT FACT SHEET

Cohort default rate is defined by statute as the percentage of borrowers who enter repayment in a certain fiscal year and default before the end of the next fiscal year. The new national default rate is for FY 1999 -- the most current data available -- and represents the cohort of borrowers whose first loan repayments came due on or after October 1, 1998, the beginning of FY 1999, and who defaulted before September 30, 2000. A default is defined as 270 days without a payment.

The national rate reflects loans made to borrowers who attended some 6,700 individual schools that participated in the Family Federal Education Loan Program (FFEL) and the William D. Ford Federal Direct Loan Program during this period.

Default Sanctions and Incentives

The department has both regulatory and statutory authority to take action against high-default schools. The regulations were put in place in 1989, giving the department the authority to terminate high-default schools from the federal student aid programs. In 1990, the department successfully sought from Congress strengthened sanctions to curb defaults, and also toughened the department's collection tools. More than 1100 schools have lost student loan program eligibility since the inception of the program with the release of the FY 1989 rates in 1991.

Schools with excessive default rates may be dropped from one or more federal student aid programs. Schools with default rates of 25 percent or greater for three consecutive years face loss of eligibility in the loan and Federal Pell Grant programs. This year, seven schools are faced with loss of loan eligibility and two schools may also lose Pell grant eligibility.

The 1998 Higher Education Amendments created various incentives for schools to lower their default rates by providing additional regulatory flexibility to schools with rates below five and ten percent.