Will You Default on Your Student Loans?

An often talked about factor when the government and industry leaders evaluate the performance of higher education institutions is the student loan default rate.

But what is this metric? Why does it matter? And should you consider it when doing your own college search?

What Is a Student Loan Default Rate?

The Student Loan Default Rate is a metric that totals how often students from a particular institution “default” or stop paying their loan back for a significant period of time. The rate is calculated as a two- year average, so it only applies to students who default on their loans within two years of leaving or graduating from a school. This is an important statistic because it can indicate whether the degree from the institution is overvalued or overpriced. If students are defaulting at a higher rate than the national average, this may imply that a degree from that institution is possibly too expensive to pay back with the jobs that are available to graduates.

How Reliable Is the Student Loan Default Rate Statistic?

There is one major problem that causes this statistic to be unreliable: manipulation.

The government has tied federal financial aid dollars to the student loan default rate of a school: To maintain eligibility for federal student loans, an institution’s default rate must stay below 25 percent. This has caused many schools to panic and look for ways to improve this statistic so they don’t lose students who rely on federal financial aid dollars, thus leading to some manipulation of the statistic.

Back in December, a number of senators called for an investigation based on prior reports that schools were contacting students in an effort to better this statistic. It was reported that schools went so far as to bribe students with McDonalds gift cards and hire private detectives to track down students who were close to defaulting. They would try to convince former students to stay current on their debts or “postpone payments” only until they were just out of the two-year window where they would count as a “default.” This is a possibly harmful practice, as it only delays the risk of default and could potentially leave students with more debt than if they defaulted within the two-year window. Additionally, it makes it harder for the government to ensure that tax dollars are going toward programs likely to pay back the loan. (More on this issue can be found here.)

What Does This Statistic Mean for You?

While student loan default rates are important, it is critical that students look at this rate within the context of other comparison factors. Knowing that there is the possibility of manipulation of this statistic, you will want to verify that the rate you are seeing for one school can be backed up by other factors. Check the reviews of the school you are considering. Does it seem like graduates are able to find jobs? Are they experiencing the postgraduation life that the school is promising? Is so, then the student loan default rate should be fairly low. If former students seem dissatisfied with postgraduation life and the career services the school provided, the student loan default rate will likely be close to the government cap of 25 percent.

Two other factors that may indicate a school’s level of quality are the graduation rate (the number of students who attend the school long enough to earn a degree) and the earnings of graduates. If a relatively low number of students graduate, or the earnings of graduates are too low to be able to pay off tuition debt, this may be evidence that the school is not the best investment.

Overall, the most important things to focus on when comparing schools are what you want to get out of the school experience and whether the school you choose can produce the results you are looking for. It is important to understand what each statistic tells you about a school and the ways in which the statistic can be manipulated. Only you can decide what is really important in your school search.

If you have any questions, let us know in the comments section! We would love to answer them!