Student-Loan Defaults Are Still Soaring Thanks to Washington's Neglect

Yes, it's a bit obvious to talk about Washington dysfunction today. But millions of financial lives have been scarred thanks to Capitol Hill's inaction. 


The official student loan default rate has hit a 16-year high, the Department of Education reported yesterday. One out of every ten borrowers whose loans went into repayment during 2011 defaulted within two years. That's up from a 9 percent two-year default rate among students who began repaying in 2010. Another 12 months has gone by, and the student loan crisis, sadly, has kept getting deeper.

It might seem a bit redundant to talk about Washington's dysfunction today, but what you're looking at in the graph above is partly the tragic product of political neglect. For the past couple of years, every overwrought confrontation about student loans on Capitol Hill has focused on tweaking interest rates, and specifically, on tweaking interest rates for new borrowers. In the meantime, our policy makers have utterly ignored the millions of former students who have already fallen behind on their loans. They've hung them out to dry. Or, really, to default.

Only recently has this begun to change. After apparently noticing that a mysteriously low number of students were taking advantage of programs like income based repayment, which caps monthly payments as a percentage of a debtor's disposable income and should make it nearly impossible to default, the Obama administration has taken some action. It has directed the Department of Education to reach out to troubled borrowers about their payment options, to see if they even know what's available to them. This is a much needed step, but it should have happened a long time ago.

Washington wasn't always so indifferent to the problems in the student loan market. When the official default rate surged to more than 20 percent in the late 1980s thanks to the fast growth of the nascent for-profit college industry, Capitol Hill tamed the crisis by passing the legislation that cut schools off from federal aid if too many of their students couldn't pay their debts.

In contrast, recent efforts to rein in for-profit colleges, which drive almost half of today's defaults despite educating only about 11 percent of students, have been met with resistance from both Democrats and Republicans in Congress. Meanwhile, the hill appears to be waiting for the reauthorization of the Higher Education Act, which is set to expire at the end of the year, to make any dramatic changes to the student loan program that might save borrowers from defaulting either now or in the future. Last time around, reauthorization took five years to complete. Today's borrowers don't have that kind of time.


A brief postscript: while the Department of Education has historically calculated a 2-year default rate for colleges, it's begun tracking a three-year rate, which gives us a more accurate sense of how many students are actually in trouble. Below, I've posted the department's breakdown by institution type. The total default rate across institutions is 14.7 percent, almost 50 percent higher than the two-year rate.