Student-Loan Default Rate Rises to 6.9%, from 5.2% a year earlier

Student-Loan Default Rate Rises
By JOHN HECHINGER and ROBERT TOMSHO

The U.S. Department of Education, demonstrating the toll the sour economy is taking on recent college graduates, reported a jump in the student-loan default rate to 6.9%, from 5.2% a year earlier.

Raising the stakes for consumers and taxpayers, the amount that students are borrowing for their education has been increasing dramatically in recent years, with half a trillion dollars in federal student loan debt now outstanding.

Robert Shireman, a senior adviser to Secretary of Education Arne Duncan, says he expects the default rate, which reflects the early part of the recession, to continue to rise. "When people are facing a job loss, figuring out how to pay their student loan is not No. 1 on their list," he said.

Mr. Shireman said the department will step up efforts to notify borrowers about alternatives to default. Starting in July, for example, borrowers will be able to start making smaller payments if they have lower incomes.

The Education Department's official loan default rate reflects only a small snapshot of borrowers who don't make their payments. The 6.9% figure is the percentage of borrowers who were required to begin repaying their debt in the year ended Sept. 30, 2007, and who defaulted on or before Sept. 30, 2008.

The most recent rate is still well below the peak default rates of the late 1980s, when the rate rose above 22%, amid widespread fraud. The fresh data represent a preliminary figure that the department previously kept private before an official release later in the year.

The Education Department also disclosed, for the first time, that the program under which the U.S. government pays subsidies to private lenders to make student loans has a higher default rate than the program under which the government lends directly to students and parents. President Obama's budget proposes eliminating the program using private lenders, making the government the sole provider of student loans.

The Education Department said it released the information after receiving a request from The Wall Street Journal under the U.S. Freedom of Information Act, as well as requests for the information from lawmakers.

The government's direct loan program reported a default rate of 5.3%, compared with 7.3% in the program using private lenders. Industry analysts said much of that difference could be attributed to the mix of schools in the program. The government program is heavily concentrated in four-year public universities, which tend to have low default rates, while private lenders cater to a higher percentage of for-profit schools, which tend to have higher default rates.

Kevin Bruns, executive director of America's Student Loan Providers, an advocacy group representing lenders, said the disparity between the default rates is "purely just a reflection of the make-up of the customer."

But Mr. Shireman noted that, even within categories, the government program had lower default rates, though the differences were far more modest.

In an online town hall meeting Thursday, Mr. Obama, answering a question from sophomores at Kent State University in Ohio about student loan debt and college affordability, said cutting out the banks from the system would save billions of dollars that would allow the government to "either lower student loan rates or expand grants."

Write to John Hechinger at john.hechinger@wsj.com and Robert Tomsho at rob.tomsho@wsj.com