Direct Loan Cohort Default Rates Lower Than FFELP For All School Types

The Department of Education released headline numbers last week showing  that the default rate had risen to 6.7% for the 2007 cohort, up from 5.2% for the 2006 cohort.  In their press release they also indicated that the DL program had a significantly lower cohort default rate of 4.8%  as compared to the FFEL program, which had a 7.2% rate:

"The 2007 cohort default rate for schools participating in the Federal Family Education Loan (FFEL) Program was 7.2 percent, a 36 percent increase over the 2006 rate of 5.3 percent. The 2007 cohort default rate for schools participating in the Direct Loan Program was 4.8 percent, a 2 percent increase over the 2006 rate of 4.7 percent. The FFEL portfolio has a larger percentage of proprietary schools, which have higher default rates, and a lower percentage of public and private 4-year schools, which have lower default rates."

For those wondering, how much of the difference was based on school mix, I thought I would do a simple analysis.  First, I missed the bar graph that the Department had provided comparing the two programs over the last three cohort years.  What was interesting this year compared to the two earlier years is that the DL program bested FFEL's default rate in each school types by 0.6% to 1.1%. 

Note that for the two previous years, FFEL had lower default rates among all school types:

2007 Cohort	Direct Lending	FFEL		Differential
Private and Public Non-Profit	3.3%	4.4%		-1.1%
For-Profit	10.5%	11.1%		-0.6%
Other	9.1%	9.8%		-0.7%
2006 Cohort
Private and Public Non-Profit	3.3%	2.8%		0.5%
For-Profit	9.8%	9.6%		0.2%
Other	8.4%	8.1%		0.3%
2005 Cohort
Private and Public Non-Profit	2.9%	2.6%		0.3%
For-Profit	8.3%	8.2%		0.1%
Other	8.0%	7.6%		0.4%

As for the answer regarding the differential in default rates: 

• Applying FFEL's school mix (54% private and public non-profit, 29% for-profit and 17% other) to DL's default rates by school type leads to an adjusted default rate for DL of 6.4% vs. 7.2% for FFEL
  •  So, of the original 2.4% differential between the two programs (4.8% for DL and 7.2% for FFEL), about 1.6% is driven by school mix and 0.8% is driven by lower default rates in the DL program.