Federal Student Loan Default Rate Jumps to 6.9% in FY08

The Wall Street Journal is reporting this evening that based on information provided by the Department of Education the cohort default rate on federal student loans has climbed to 6.9% for FY08 from 5.2% in FY07.  This preliminary figure calculates the percentage of borrowers that entered repayment in the year ending September of 2007 who went into default on or before September of 2008. 

To provide some insight into how these default rates rise as the loans continue to age, the Department recently released cumulative lifetime default figures for the 2002 cohort which saw its overall cohort default rate rise from 5.2% at its first measurement point in 2003 to 11.5% five years later (and remember this was before the dramatic weakening in the employment picture in late 2008/early 2009):

                         

	Cumulative
	Lifetime Default
2-Year Private	21.8%
2-Year Public	21.1%
4-Year Private	6.9%
4-Year Public	8.5%
Proprietary	25.2%
Foreign Schools	4.7%
Overall	11.5%

The article also described data provided by the Department of Education comparing cohort default rate comparisons between the FFEL and Direct Lending programs:

"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."

I completed a similar analysis using 2006 cohort default data which is posted here which found that while the direct loan program had a lower overall rate than FFEL (4.5% vs. 5.3%), there was little variance between the two when comparing them across school categories. 

What is the importance of releasing this information now?
As the fate of FFELP hangs in the balance, its advocates are highlighting the value-added services offered by FFELP lenders as critical elements in any new student loan model going forward.  These value-added services include default prevention, financial literacy and outreach activities.  The release of this data from the Department of Education would appear at first blush to weaken this argument.  My notes from the Sallie Mae Straight Talk Conference Call on Monday mentioned a white paper demonstrating their ability to achieve superior default rates:

Sallie Mae will be releasing white paper today (Tuesday) to demonstrate the impact of its default prevention activities.  It will compare cohort default rates between Sallie Mae FFELP loans and Direct Loan portfolios.  They touted the results as being quite significant with rates 30-50% lower for the Sallie Mae portfolios depending on school type. 

After scouring Sallie Mae's website for press releases and white papers this afternoon, this white paper does not appear to have been released yet.  If anyone has a copy feel free to send along and I will be sure to post to the blog.