U.S. student loan debt now exceeds credit card debt, having topped one-trillion dollars.And default rates are rising again. And what about your credit? Can you save it?

Student Loans: Who Defaults?

Financial aid expert Mark Kantrowitz (2010) reports that student loan default rates rise as the ratio of student loan debt service to discretionary income (income above the poverty level) increases. The default rate "maxes out" (stops rising) when the debt service ratio equals about thirty percent of discretionary income.

Debt Demographics

While six-figure debt at graduation is most common for graduates of non-profits who hold a mix of federal (FFEL or Direct) and private loans (Kantrowitz, 2012; these may be middle class students), the greatest average debt burden at graduation is that of graduates of proprietary (for-profit) colleges. The debt burden (but not default rate) is also higher for graduates of four-year when compared to graduates of two-year institutions. Debt also varies with ethnicity, according to Hing and Lee (2011), being highest for Native Americans, followed by Blacks, Asians, and Pacific Islanders. It's higher for students in the arts than in computing and engineering.

Hours Completed and Default

Like students with debt equal to a large percentage of their incomes, students who do not complete their studies are more likely to default. Texas Guaranteed Student Loan Corporation (TGSLC)'s 2005 study of default rates for a Florida University (University of South Florida) reported that students who did not graduate were three percent more likely to default than those who did, and that the difference was statistically significant.

U.S Department of Education data suggests a much lower lifetime budget default rate (the budget default rate is the total volume of money budgeted for loans, not the total volume of loans that TGSLC looked at) for loans of students who leave four-year schools (proprietary, non-profit, public) as juniors or seniors than for loans of students who leave these as freshmen or sophomores. Ten to twelve percent of money budgeted for loans made to the former group is defaulted on during the loan lifetime versus around twenty-five percent of money budgeted for loans to students who leave as freshmen or sophomores.

Moreover, graduates of two-year programs are more likely to default than graduates of four-year programs. Kantrowitz's examination of 2011 "Gainful Employment Data" (2012) suggests also that students who graduate from two-year programs may have little or no income above poverty level. Kantrowitz believes this can explain high default rates for two-year programs at more expensive schools (non-profit, proprietary). If so, the Income-based Repayment Plan, which became available to student loan holders in 2009, should help to alleviate this. However, for most school types, default rates climbed slightly from 2008 to 2009.

Tracking Defaults: New Three-Year Rates

Increased federal scrutiny of student loans means tracking loans using the new three-year cohort default rates. The percentage of loans that default (not the percentage of budgeted loan money that defaults; the latter is the budget default rate) is now tracked over three years. These three-year rates tend to be higher than two-year rates (the percentage of loans that default within two years). The nationwide three-year cohort default rate for 2009 was almost fourteen percent (one in six borrowers defaults). Schools will ultimately be sanctioned when three-year default rates exceed thirty percent.

According to Louisiana's Association of Student Financial Aid Adminstrators (2010), almost a year-and-a-half passes from when a loan holder stops making payments until a default is recorded. There is a slight difference according to loan type: defaults are recorded either when the loan holder does not make payments for 270 days or when the guarantor pays. Also some FFEL loans are not considered to be in default until the loan holder has not made payments for 330 days.

Federal Versus Private

Default rates for both federal and private student loans are, as noted, rising. Default rates for FFEL and Direct loans, both federal, are similar. Present rates may be slightly higher for the FFEL but this depends on the institution type (public, non-profit, proprietary). Default rates for both loan types remain several percentage points higher than private student loan default rates, and the percentage of outstanding debt for both is neck-in-neck as of 2014 according to data provided by the Federal Education Budget Project (New America Foundation). The latter requires a credit check.

Default Rates and "For-Profit" Schools

About half of defaulted loan money involves loans made to students at proprietary colleges. Up to forty-nine percent of money budgeted for loans at two-year proprietary colleges goes into default over the loan lifetime. This is the loan lifetime budget default rate.

Proprietaries' cohort default rates vary immensely, ranging from ten to over forty percent. Proprietary schools with high cohort default rates have included Kaplan College (around 20%) and Everest Institute (over 30%). Nevertheless two-year cohort default rates (the percentage of loans, not the budgeted amount, that goes into default within two years) for proprietaries fell slightly for loans that went into repayment in 2010. 2010 rates for proprietaries were about a percentage point lower than rates for loans that went into repayment in 2008 or 2009. The default rate for four-year proprietary colleges had continued to fall as of 2011. Meanwhile two-year cohort default rates for other institution types, both public and non-profit, have risen, with default rates for less than two-year non-profit and two-year public institutions comparable to default rates for two-year and less-than-two-year proprietaries. Kantrowitz believes the proprietary colleges have services to offer, and has praised the slight decline in their default rates.

Three-Year Versus Two-Year Cohort Rates

Alas however, three-year cohort default rates for loans that entered repayment in 2009 (percentage of loans that entered repayment in 2009, then defaulted between 2009 and 2012) may tell a slightly different story about proprietaries. When compared with two-year cohort default rates for these same loans (defaults occurring between 2009 and 2011 for loans entering repayment in 2009; the 2010 three-year rates are not yet available), three-year default rates for proprietary colleges are much higher. Three-year rates exceed 22 percent while two-year rates for proprietaries hover at 15.4 percent or less, depending on institution type.

Similarly, loans made to students at public universities which entered repayment in 2009 had two-year cohort default rates several percentage points above? their three-year cohort default rates. Loans made to students at non-profit universities, with the lowest three-year cohort default rates, just over seven percent, were also several percentage points above? the three-year rates, but closer to them. Proprietary schools are being scrutinized for differences between the three-year and two-year default rates.

Four-Year, Two-Year, Less-than-Two-Year Schools

Loans made to students at four-year proprietary institutions still have higher cohort default rates when compared to loans made at all other four-year institution types. However, cohort default rates on loans made to students at less-than-two-year proprietaries were slightly lower than (but as noted above, similar to) default rates on loans made at non-profit less-than-two-year institutions, while higher than default rates on loans made at public less-than-two-year institutions (Department of Education, 2012).

Monitoring Proprietary Budgets?

Up to ninety percent of proprietary budgets comes from financial aid. Some, including U.S. Education Secretary Arne Duncan, seek more monitoring of for-profits, which sometimes spend more of their budget on advertising than on program development and accreditation.

Most proprietary schools are of course accredited. Programmatic accreditation may be a different story: Argosy University for example has its Clinical Psychology program and Counselor Education program accredited along with its culinary and interior design programs, but not its Medical Technology program. The Council for Higher Education Accreditation (CHEA) lists Chea-recognized accreditation agencies for various fields.

Dismal Graduation Rates

Proprietaries also have dismal graduation rates, sometimes attributed to their serving minority and low income students. Kantrowitz suggests that for-profits have more low-income students than community colleges, based on data about Pell Grant recipients. However there will, of course, be more Pell Grant recipients when more students apply for financial aid because of higher college costs. Community college tuition in fact remains below four-year public university tuition while proprietary tuition tends to be about twice as high, according to CNN Money's Aaron Smith (2012), and thus the higher ratio of Pell Grant recipients to non-Pell Grant recipients may not reflect lower student incomes but higher costs. Also data in Kantrowitz's, "Adjusting Default Rates According to Borrower Demographics" (2010) suggests something else, which Kantrowitz ignores, that the default rate for proprietary school loans is higher than for loans made at other types of schools, even for non-Pell grant recipients (see the graph, "Default Rate for Pell Grant Non-Recipients as a Percentage of the Overall Default Rate").

Demographics of Graduation, Default

Poor graduation rates, as noted above, have been linked to default. Graduation rates, at least for veterans, are especially dismal at the proprietary colleges, says CNN Money's Aaron Smith (2012). Graduation rates are also dismal for Latino students, and of course one state with a large number of Latino students, Arizona, has the highest default rate of all states.

Arizona's high cohort default rates (almost 16 percent for the two-year default rate, 22 percent for the three-year), however can, some argue, be attributed to the fact that default rates for online students at the University of Phoenix (a proprietary) are reported under Arizona regardless of where students reside. The second highest default rate is for Arkansas followed by Indiana. Indiana schools with high rates include Kaplan College and Ivy Tech Community College. Texas, which like Arizona has a high proportion of Hispanic students, is among the top ten states for loan default, but is below Arizona and Arkansas.

Jobless Rate and Default

Another factor is the unemployment rate (and the youth unemployment rate). The state with the lowest default rate is North Dakota. North Dakota also has the lowest unemployment rate according to the BLS, but hardly the highest graduation rate. North Dakota's low default rate is followed by the slightly higher rates of Wisconsin and several New England states. The latter of course are homes to Dartmouth, Harvard, Yale, and the Massachusetts Institute of Technology (MIT). MIT has a default rate of just 0.2 percent. (Another technically-oriented non-profit, Cal Tech, has a zero percent default rate according to Business Insider's Linette Lopez, 2011.) Graduation rates are high for both Wisconsin and New England. For most of the New England States, Connecticut excepted, unemployment is relatively low, but unemployment is not quite so low for Wisconsin, according to BLS data for 2012.

A Win for Government Collection?

According to Kantrowitz again, the government which insures federal loans (but not private student loans) collects about 85 cents for every dollar defaulted on, a much higher rate than is collected for defaulted credit card debt. However the government pays in other ways, paying loan interest through new programs such as the "Income-based repayment plan" (where monthly payments are set at 15 percent of income, with any remaining balance after twenty-five years of on-time payments forgiven, and also possibly some student loan interest paid during the twenty-five year period, if the borrower's payments do not equal the interest) or "Pay-as-you-earn repayment plan" (available to persons who took out Federal student loans after 2007; payments are set to ten percent of income, and excess forgiven after twenty years of on-time payments), as well for persons working in VISTA-Americorps. In addition, student loan debt, unlike credit card debt, can be cancelled for total disability or for death, although, according to some, cancellation for disability is difficult to get.

However, default rates, if they continue to rise, may affect what the government collects, although recovery rates on defaulted debt are good. One reason may be that student loan debt cannot be discharged through bankruptcy. As noted above, default rates are rising, and the Federal (Direct) student loan default rate jumped from five percent (in 2004) to ten percent (by 2011), according to AnnaMaria Andriotis (June 14, 2014, Wall Street Journal). That is, says Andriotis, of the "4.7 million borrowers" who began repaying student loans between October of 2010 and September of 2011, 470,000 entered default.

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