Analyzing Five Year Cohort and Cumulative Default Rates on Federal Loans

Making my way through a five year analysis of cohort default rates released by the Department of Education today.  This includes three charts including cohort default rates, budget lifetime default rate and cumulative lifetime default rate.  Here is a description of each of the charts and what data is represented.  Just to make things interesting, this note appears at the bottom of the page (not sure that this would fly in the private sector): 

PLEASE NOTE THESE RATES CAN NOT BE COMPARED SINCE THEY ARE BASED ON DIFFERENT ATTRIBUTES:  BORROWERS, DOLLARS, LOANS AND INSTITUTIONAL CATEGORIES.

Here are a few insights for each of the three charts:

• Cohort default rates, as currently calculated (the percentage of borrowers who enter repayment on certain Federal Family Education Loan (FFEL) Program or William D. Ford Federal Direct Loan (Direct Loan) Program loans during a particular federal fiscal year, October 1 to September 30, and default or meet other specified conditions prior to the end of the next fiscal year), have been in a tight range of 4.5% - 5.2% over the past five years.  This number can be expected to increase given the current economic troubles
  
  • At every institutional category (public, private, proprietary), cohort default rates drop the longer the student remains in school.
    
    • For public and private institutions, the cohort default rates for borrowers attending for 4+ years are at least 50% lower than those attending for 2-3 years.   Call it the value of persistence!

• For the Budget Lifetime Default Rate table, which is calculated based on dollars and assuming a cohort life of 20 years, a few things stood out:
  • Budget estimates for students at two year proprietary schools, the highest credit risk group, put the lifetime default rate at between 38.0% and 40.8%.  It is not hard to see why private lenders might be skittish about lending to this student population. 
  • Budget estimates have been increasing with each of the five cohorts provided; the 2002 cohort has a Budget Lifetime Default Rate of 10.8% while the 2006 cohort has a budgeted default rate of 11.9%.  I wonder if this might be a mix issue where the rate of borrowers at proprietary schools is growing faster than that at non-proprietary schools. 

• The Cumulative Lifetime Default Rate table, which measures the percentage of loans that have actually gone into default yielded the following insights:
  • For the 2002 Cohort, 6 years into repayment, 25.2% of proprietary loans had already defaulted, which was 3.5X higher than 4 year private loans which had the lowest cumulative default rates. 
  • Within all cohorts, 4-year private loans have defaulted at 1.3% - 1.6% lower rates than 4-year public loans.  
  • Since Budgeted Lifetime Default Rate is expressed in dollars while Cumulative Lifetime Default Rate is expressed in loans, it is difficult to do the traditional "performance vs. budget" analysis.
    • If I was a betting man, however, I would assume that loans are performing worse than budget.  Why?
      • Take the 2002 Cohort which was budgeted to experience lifetime defaults of 10.8% on a dollar basis.  The actual cumulative defaults on a loan basis are 11.5% after 6 years in repayment.  Unless the loans that are defaulting are much smaller than average, I would assume that lifetime cumulative defaults for the 2002 cohort will exceed the budget. 
        
        • Which raises the question:  Why can't these figures be reported on a comparable basis to make our lives a little easier?