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FOR RELEASE January 9, 1997
Contact: Jane Glickman (202) 401-1307 Stephanie Babyak (202) 401-2311
President Clinton today announced that the national student loan default rate has fallen to 10.7 percent, less than half the 22.4 percent level of just four years ago and the lowest default rate ever.
The President was joined at the White House by U.S. Secretary of Education Richard W. Riley, who attributed the decline to a combination of accountability efforts by the Education Department, tough enforcement sanctions authorized by the Congress, and strong efforts by the schools themselves. "Since coming to the Department, one of my top priorities has been turning around the nation's serious default problem," Riley said. "We have used every tool available to slash the default rate and save taxpayers hundreds of millions of dollars -- and these efforts will continue."
The new national default rate is for FY 1994 -- the most current data available -- and represents a snapshot in time of borrowers scheduled to begin their loan payments in 1994, and who defaulted in either that year or the following year. The national rates are published with the release of Federal Family Education Loan (FFEL) default rates of some 8,000 colleges, universities, and trade schools that participate in the federal student loan programs.
A significant rise in collections in the last few years has substantially reduced the net cost of defaults, which is the amount paid out by the U.S. Treasury to cover defaulted student loans minus the total amount collected by the Education Department, Treasury, and guaranty agencies.
Riley said both the department and the guaranty agencies have taken an aggressive approach to the collection of defaulted student loans, employing a wide range of collection tools. Defaulted student loan collections by the federal government and guaranty agencies more than doubled from $1 billion in FY92 to $2.2 billion in FY96. As a result, the net default costs were $249 million in FY96, compared to $1.7 billion in FY92.
In addition, since March 1996, the Department has resolved a backlog of 1,476 appeals of cohort default rates filed by 525 schools between fiscal years 1989 and 1993. As a result, 144 schools are no longer eligible for the federal student loan programs (FFEL and the federal direct loan program). Until appeals are resolved, schools continue their eligibility in the loan programs. "By clearing up the backlog," Riley said, "we were finally able to eliminate schools with the highest default rates, thus helping to lower the overall default rate in the future."
The Department also identified today 357 postsecondary schools that may be dropped from one or more federal student aid programs because of excessive default rates in FY1994. Schools have the right to appeal.
The Higher Education Amendments of 1992 (P.L. 102-325) mandate that schools with default rates of 25 percent or greater for three consecutive years face loss of eligibility to participate in the FFEL and direct loan programs. This year 329 schools are affected by this provision, including 108 new schools and 221 schools whose loss of eligibility was extended another year based on their 1994 rates. Historically Black Colleges and Universities, tribally controlled schools and Navajo community colleges are exempt from sanctions until July 1998.
In addition, under Department regulations, schools with a one-year default rate over 40 percent may have their eligibility for all federal student aid programs restricted or terminated. Based on the 1994 rates, 157 schools fall in this category.
Borrowers who default on federal loans face serious repercussions, such as the withholding of federal income tax refunds, wage garnishment, adverse reports to credit bureaus, denial of further federal student aid, and litigation. For example:
the Department recovered $535 million in FY96 by offsetting federal income tax refunds from 573,000 defaulters;
the Department's wage garnishment program increased from 5,000 defaulters in FY95 to 25,000 in FY96;
federal lawsuits against student defaulters increased from 200 accounts in FY95 to over 8,000 in FY96.
To avoid these sanctions, defaulters now have the option to consolidate their loans and establish an income based repayment plan that more realistically matches their ability to pay. Riley noted that the new Direct Loan Program will help to reduce defaults further. "All borrowers can take advantage of the income based plan as well as other flexible repayment plans offered through direct loans, and we're confident that these options will help many borrowers avoid default in the first place," Riley said.
"President Clinton has been a strong advocate for Direct Lending since its inception," Riley said, "because it offers borrowers more repayment options after school and more control over personal finances, which enables graduates to pursue a broader range of career choices. And he knows that Direct Lending can go a long way in reducing default costs to taxpayers."
"Our goal is to continue to improve accountability and stewardship of all the federal student aid programs and secure access to higher education for all qualified students," Riley added.
Borrowers who believe they may be in default on a federal student loan should contact the holder of the loan for more information about available repayment options. For accounts currently being handled by the department or to locate a past due account, borrowers may call the department's Debt Collection Service Center at 1(800) 621-3115.