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Student debt in the United States has been notoriously bad and the situation is not getting better. The rate of student loan defaults increased a sixth year in a row according to figures published by the US Department of Education. The two-year cohort default rate rose from 9.1 % in 2010 to 10 % in 2011. The issue of a continuing increase in student loan defaults has raised attention and concerns among the highest political ranks in the USA.
The cohort default rate is the percentage of a university’s borrowers who repay loans for the Federal Family Education Loan (FFEL) or the William D. Ford Federal Direct Loans Programme (FDLP), the two major US higher education low-interest loan programmes. Cohort default rates are currently measured on a two and three year basis, but will be calculated exclusively on a three year basis from 2014 onwards, as they provide better information on the overall percentage of borrowers who fall behind paying their student loans. The number of former students of a US higher education institution who default their student loans is crucial for eligibility of an institution for federal student aid. If this rate reaches 25 % (30 % according to the new three-year cohort default rate scheme) for three consecutive years, or even 40 % in a single year, an institution loses eligibility for federal student aid. This means that students enrolling at such a university would not be eligible for FFEL or FDLP. The measuring of cohort default rates was introduced in the 1980s in order to fight fraud and malfunctioning higher education institutions. In the past, these would enrol students who were not qualified for offered programmes or who would not benefit sufficiently from an awarded degree in order to repay their student debt. The introduction of the cohort default rate served as an indicator for low-quality institutions and led to the closure of a high number of trade schools and other higher education institutions in the early 1990s which had sprung up like mushrooms during the 1980s.
The cohort default rate of 10 % reached a new height similar to the rate in 1995 when rates began to plunge and stayed around 5 % from 1999 till 2006. The increasing rise in student loan defaults is in part a consequence of exorbitant tuition fees, entailing the risk of simply unaffordable student debt. Prior to the US Department of Education’s publication, US President Obama proposed to tackle the worsening problem of student debt by capping borrowers' federal student loan payments at 10 % of their monthly income. This would allow borrowers more time for their student loan repayment. Yet, in light of unaffordable tuition fees, rising student debt and increasing cohort default rates this proposal is but a drop in the ocean.
U.S. Department of Education press release