Defaults on federal student loans fell for the first time in several years, but they stayed far above levels reported before the recession, the Education Department reported on Wednesday.
Among borrowers who were in their third year of repayment as of a year ago, 13.7% had defaulted, down from 14.7% in 2012. Previous years default figures were reported differently, but they showed a sharp increase through the economic downturn.
The latest default rate represents the percentage of borrowers who began the repayment process on federal loans during the fiscal year that started Oct. 1, 2010, and then defaulted by Sept. 30, 2013.
The Education Department named 21 schools where the default rates were so high that they could lose eligibility under federal law to receive federal student grants and loans. Twenty of the 21 schools are for-profit, and nearly all are small trade schools. Several on the list are cosmetology schools. The identified schools can appeal the loss of funds but otherwise losing funding eligibility is considered a death sentence for almost any postsecondary school.
Under law, any school with a default rate of 30% or more for three consecutive years, or a rate of 40% for one year, faces the loss of access to federal funds. Over all, the default rate was 12.9% for students at public schools; 7.2% at private, nonprofit schools; and 19.1% at for-profit schools. All three figures declined from the previous year.
The default rate is on of the most closely watched metrics in higher education. It has fueled debate in recent years over the value of a college degree and the tendency of students to take on too much debt.
Former students' loan defaults, along with employment rates and income, are signs of how well schools prepare students for the job market. Some borrowers have several federal loans handled by different servicing companies. That practice is being phased out, with the goal of each student being able to make payments to just one company.
Schools have complained that people with multiple servicers are commonly likely to be current on some loans but not others, and thus will be counted as in default, but the Education Department said it excluded those borrowers from its calculations if including them would have put a school in violation of default standards. Only about 400 borrowers had been removed from the figures as a result of this, out of almost four million, officials said.
"While it's good news that the default rate decreased from last year, the number of students who default on their federal student loans is still too high and we remain committed to working with postsecondary education institutions and borrowers to ensure that student debt is manageable," Education Secretary Arne Duncan said in a statement.
In the past, the Education Department judged schools' compliance with default standards by how many people defaulted in less than two years, not three - a figure that climbed to 10% last year, from 6.7% in 2009.
Government officials and consumer advocates said the two-year measure was too easy for schools to manipulate to make themselves look better, by having students categorized as deferring payment rather than defaulting until after the two-year mark. Only a handful of schools faced sanctions under that standard.
As of 2014, federal law switched to the tougher, three-year standard, leading to more schools' possibly losing eligibility for grant and loan programs.
Noah Black, vice president for public affairs for the Association of Private Sector Colleges and Universities, said in a statement that the association, which also serves as the lobbying arm of for-profit colleges, has been concerned before with the department's method for calculating default rates.
"Since the department now thinks this is such an extraordinary situation, the logical question is why are they not making the adjustment for all institutions?" Black said. "Doing so would certainly result in a more accurate measure of three-year [cohort default rates] a metric that is used to determine eligibility for state grants, speical disbursement rules and serves as the underpinning for the programmatic [cohort default rate] in the proposed gainful employment regulation."
The institutions on the list and subject to loss of eligibility sanctions include: Ohio State College of Barber Styling; American Commercial College; Merrillville Beauty College; Manhattan Beauty School; Guti, The Premier Beauty and Wellness Academy; Henri's School of Hair Design; Charleston School of Beauty Culture; Tidewater Tech; LT International Beauty School; Aaron's Academy of Beauty; Ventura Adult and Continuing Education; Aviation Institute of Maintenance; Jay's Technical Institute; Floriday Barber Academy; Northwest Health Careers; Palladium Technical Academy; Eclips School of Cosmetology; Coast Career Institute; San Diego College; RWM Fiber Optics and Memphis Institute of Barbering.