A r c h i v e d  I n f o r m a t i o n

FOR EMBARGOED RELEASE: 11:30 a.m. EDT
October 5, 1999

Contact:
Jane Glickman (202) 401-1307
Stephanie Babyak (202) 401-2311

STUDENT LOAN DEFAULT RATE DROPS, AGAIN;
8.8% IS LOWEST RATE EVER

The national student loan default rate fell to 8.8 percent for fiscal year 1997, the lowest point since the federal government started calculating the rate with FY87 data, U.S. Secretary of Education Richard W. Riley announced today.

This marks the second straight year the rate has been below 10 percent - down from 9.6 percent for FY 1996 - and the seventh year in a row the default rate has declined. The rate hit its highest point of 22.4 percent in FY 1990.

"Lowering the default rate and improving our accountability to the American taxpayer has been a priority for the department throughout the Clinton administration," Riley said. "The release of today's data proves that our commitment and vigilance has reaped very substantial benefits. This new rate exceeds our expectations, and all our partners in the federal student loan programs - students, schools, guaranty agencies, and lenders - deserve credit. So, too, does the strength of the economy and the resulting low employment rate, which has made it easier for borrowers to repay their debt."

The cohort default rate is defined by statute as the percentage of borrowers who enter repayment in a certain year and default before the end of the following year. The department uses the rate to identify schools with students who default at high rates and as a leading indicator for measuring progress in reducing loan defaults from year to year.

The new national default rate is for FY 1997 - the most current data available - and represents the cohort of borrowers whose first loan repayments came due in FY97, and who defaulted sometime before the end of FY 1998 on Oct. 1, 1998. The national rate reflects default rates for more than 7,000 individual schools that participated in the Family Federal Education Loan Program (FFEL) and the William D. Ford Federal Direct Loan Program at that time. [NOTE: About 1,000 schools that no longer participate in the federal loan programs are not included in lists of individual school default rates issued today.]

For the second year in a row, the default rates have declined for every type of institution - public and private, both four-year and two-year institutions, and proprietary schools with programs of all duration.

Total loan volume has more than tripled in the last decade. In FY 1997, students took out 8.4 million loans worth $34.1 billion (9 million loans worth $42.9 billion in FY 1999), up from 4.1 million loans worth $11.7 billion in FY 1990.

In FY 1999, more than $1 billion will be collected through federal offsets, a 66 percent increase over collections the previous year; $1 billion will be collected through other collection tools, and another $1 billion in defaulted student loans will be consolidated by guaranty agencies or the department.

Schools with excessive default rates may be dropped from one or more student aid programs. The Higher Education Act (HEA) provides that schools with default rates of 25 percent or more for three consecutive years face loss of eligibility in the FFEL and direct loan programs; the 1998 amendments to the HEA added loss of eligibility for the Pell grant program for schools with these rates. Schools have appeal rights and can remain in the loan programs while an appeal is pending.

This year, 42 schools are faced with loss of loan eligibility under this provision and 11 of these schools may also lose Pell grant eligibility. The other 31 schools either withdrew or were removed from the loan programs prior to the 1998 law taking effect and, thus, remain eligible to administer grants. In addition, under department regulations, schools with a one-year default rate over 40 percent may have their eligibility for all federal student aid programs restricted or terminated. Based on the FY 1997 rates, 13 schools fall in this category. The total number of schools subject to one or both sanctions is 49.

The 1998 amendments created various exemptions from the default sanctions for schools with few borrowers and low loan volume, resulting in an overall decline in the number of schools subject to the loss of program eligibility.

The 1998 amendments also ended, as of July 1, 1999, the exemption of Historically Black Colleges and Universities (HBCUs), tribally controlled institutions, and Navajo community colleges from some of the sanctions based on default rates. These schools can remain eligible if they meet certain criteria, including submission of an acceptable default management plan. Only a fraction of the 100 HBCUs currently participating in Title IV programs had high default rates. However, all these schools submitted acceptable default management plans and therefore remain eligible. None of the tribally controlled institutions or Navajo community colleges was in jeopardy.

"Lowering the default rate is an essential aspect of our Five-Year Performance Plan, " said Greg Woods, chief operating officer of the Education Department's Office of Student Financial Assistance (SFA). "We've been helping schools effectively manage their programs to cut their default rates, and we're weeding out schools with the highest rates."

"SFA and our lending partners," Woods continued, "have increased the number of on-site visits, seminars and training conferences for HBCUs and other schools that needed assistance in managing their default rates. The entire lending community has pitched in to help schools share best practices on reducing their default rates, including ways to increase student retention and employment rates. Many schools are taking creative approaches to identify and work closely with those students most likely to default. It's clear -- with the release today of an 8.8 percent cohort default rate -that going the extra mile pays off."

More than 2,600 schools can take advantage this year of a new provision added by the 1998 amendments that benefit schools with low default rates as well as the students attending them. Schools with default rates under 10 percent for the three most recent consecutive years can get loan money to students faster. They can provide funds to students in one, rather than two, separate installments, and they no longer have to withhold funds from first-time borrowers for an extended period of time. The faster process alleviates administrative burden for schools which have shown to present little risk to the taxpayers.

Borrowers who default on federal student loans face serious repercussions, such as the withholding of federal income tax refunds and other federal payments, wage garnishment, adverse credit bureau reports, and denial of further federal student aid.

To avoid these sanctions, defaulters have the option of consolidating their loans and establishing an income-based repayment plan that matches their ability to pay.

Borrowers who believe they may be in default on a federal student loan should contact the holder of the loan for more information about available repayment options. For accounts currently being handled by the department or to locate a past due account, borrowers 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: www.ed.gov/PressReleases/index.html.