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FOR RELEASE January 22, 1996
Contact: Jane Glickman (202) 401-1307 Stephanie Babyak (202) 401-2311
U.S. Secretary of Education Richard W. Riley today announced that the national student loan default rate has been cut almost in half, from 22.4 percent three years ago to 11.6 percent in the most recent year, due in part, he said, to the U.S. Department of Education's aggressive accountability and collection efforts.
The new rate released today marks the greatest one-year percentage drop since official student loan default reporting began with the fiscal year (FY) 1988 rate.
The new default rate is from FY 1993, the most current data available, and it represents a snapshot in time of borrowers scheduled to begin loan payments in FY 1993, who defaulted in either that year or the following year.
"The dramatic decline in default rates, coupled with an equally impressive rise in defaulted loan collections, has reduced the taxpayers' burden by millions of dollars," Riley said. "These numbers reflect real and substantial progress. They are a result of our serious work at the U.S. Department of Education to improve our accountability."
Riley also credited schools for their efforts to reduce defaults and Congress for authorizing a broad range of tough sanctions to control defaults.
Since the start of the Clinton Administration, the net cost of student loan defaults has dropped by more than two-thirds -- from $1.7 billion in FY92 to $400 million in FY95. In FY 1995, the U.S. Treasury paid out $2.4 billion to cover defaulted student loans. Total collections of $2 billion by the department and guaranty agencies brought net default costs down to $400 million. The department's defaulted loan collections alone have increased five-fold from 1993 to 1995.
"The department's comprehensive programs to prevent defaults, to collect on overdue loans, and to help borrowers repay debts are paying off," Riley said.
Riley said defaulters face serious sanctions, including federal income tax refund offset, wage garnishment, denial of further student aid, and loss of other forms of loans and credit. However, defaulters now have the option to consolidate their loans and establish an income-based repayment plan in order to avoid sanctions.
President Clinton's new William D. Ford Federal Direct Loan Program offers borrowers with all types of federal student loans a similar income-based repayment plan. With direct lending's consolidation plan, borrowers can take advantage of the program's flexible repayment options to make repayment easier and avoid default in the first place.
Riley reported that the department's collection tools and accountability measures have reaped these results:
The department recovered $598 million in FY94 by offsetting federal income tax refunds from 781,000 defaulters and $585 million in FY95 by offsetting refunds from 774,000 defaulters;
Wage garnishment has increased from some 5,000 defaulters in all of FY95 to nearly 8,300 persons in the first quarter of FY96;
Litigation against student defaulters has increased from 200 accounts in FY95 to 708 accounts in the first quarter of FY96.
Riley also attributed the declining default rate to the department's statutory and oversight responsibility to remove schools with high default rates from participating in federal student loan programs. Since 1993, some 600 schools have become ineligible as a result. In addition, the department's strengthened accountability activities have prevented many schools that don't meet basic financial or administrative criteria from participating in federal student aid programs.
Riley said that with a new National Student Loan Data System (NSLDS), the department is further improving its monitoring of student aid applications to prevent ineligible students -- and students who provide false information -- from receiving federal funds. In the current school year, the NSLDS blocked the issuance of $230 million in loans to ineligible applicants.
"These significant default reductions and loan collections should quiet critics who claim we aren't up to the task and, therefore, shouldn't be entrusted to manage the direct loan program." Riley said. "These figures are a clear indication that we can do the job and do it well."
Riley said student loan borrowers who believe they may be in default on a federal student loan should contact the holder of the loan for additional information on repayment options that are available. For accounts currently being handled by the department, or to attempt to locate a past due account, borrowers may call the department's Debt Collection Customer Service Center at 1-800-621-3115.