Default rates measure the percentage of students who fail to repay their federal student loans. A lower default rate indicates that students are finding an adequate means of income after leaving the school because they can afford to pay back their student loans. In addition, lower loan default rates also indicate a lower amount of student debt. For each school, we looked at the most recent cohort default rates published by Peterson’s for the 2013 fiscal year.
Peterson’s did not have the default rate for all of the colleges on our list. We did not, however, want to penalize those colleges without data. To that end, we simply excluded those schools from the rankings in this category.
The Importance of Default Rates
Potential students might tour the campus of a prospective college, inquire about class sizes, or even try out the food in the cafeteria before making their final choice on where to go to school. But there’s another aspect of the big decision that is important to not overlook: the college’s default rate.
Let’s start at the very beginning. When a student borrows money to help pay for college, but then doesn’t pay the loan back as scheduled, that is called a default. Therefore, student loan default rates for colleges are the rates at which their graduating students are not paying back their loans.
While at first glance loan default rates may point to the student’s inability to pay back the loan, it can also be very telling about the college itself. If a school has a low default rate, they have potentially taken on the issue as a point of focus, helping students avoid debt and/or better preparing their students to be a competitive work candidate after graduation. Schools can assist students by offering additional forms of financial aid like scholarships, grants, and on-campus or work-study jobs, and try to keep student loan rates low. Then, after graduation, they continue to work with the students to ensure they are being responsible borrowers.
This is important, as student loan rates and debt are higher than ever before. College is expensive, and can be difficult to pay off if the borrower is unprepared. In effect, a student takes out a loan with hopes that the college they choose will be a wise investment. This means that the college will adequately prepare them with the tools they need to obtain quality employment post-graduation.
But research has show that this investment doesn’t always pay off. More than 40% of students who finish college with debt will have delinquent or defaulted loans within five years. This makes it even more critical for colleges to provide support for students.
Because student loan debt is such a trend, colleges that can maintain minimum default rates have the opportunity to be recognized against other higher-debt rate alternatives. Prospective students will take note, as will accreditors and college-ranking organizations. Many factors can play into an individual’s inability to pay back the loan as scheduled, like their financial means, the state of the economy when they graduate, and the loan’s terms, but colleges can still do their part to mitigate the problem and provide essential outlets and services to assist students.
For instance, colleges with lower default rates have likely taken steps to prepare a strategy and process around keeping them that way. First, they have made the issue a whole-campus initiative. This means that professors and the administration are under the assumption that debt is not just a financial aid issue. These colleges also might have a person onsite to further help with default prevention and promote financial literacy. This person is usually part of a larger debt management team, which brings together departments and staff from all over the college to act as a triage to default. Financial aid packages are typically more robust at these institutions, too, and their offices are well-equipped to walk students through the debt process and explain the consequences of borrowing too much.
Defaulting vs. Delinquency vs. Deferment
The world of student loans can be a tricky one, full of jargon and different levels of payment stages. During loan repayment, especially if you are finding it hard to keep on schedule, you will likely hear three words: delinquent, default, and deferment.
Any student who misses a payment, from the first day on, is considered delinquent. This is when the negative effects on non-payment start to set in. Students will start getting notifications from their loan provider, and delinquency that continues for a long period of time could result in lost of interest rate discounts on the loan and jeopardize your credit score. Delinquency is any period up until the loan is considered in default.
Based on how long your loan has been delinquent, there are a variety of steps to rectify the problem. If you have only missed one or two payments, call your loan servicer immediately. If it has been under 60 days, your status may not have already been sent to credit companies. You have probably incurred some fees and late payment charges, so you’ll need to pay those while getting your account caught up.
If you’ve missed more than two payments, taking action is imperative. This is the time when your information has been sent to credit companies, and your delinquency will start to become part of your credit score. Work with your loan servicer on a payment plan that might better meet your financial means, and try to get the loan down to under 90 days past due.
Once you hit the six-month mark, you start running out of options and safety nets. Collections and wage garnishments become a real possibility, so it’s critical you contact your loan servicer ASAP.
If you don’t, your loan will likely move to default status. A student loan in default occurs when no payments are made on the loan for 270 days (or about nine months). Defaulting on a loan comes with harsh consequences. Instead of the original payment schedule, the full balance of the loan becomes due. You also lose the eligibility to request deferment or forbearance, and you won’t be eligible to receive additional student loans in the future. Any income tax refunds can also be garnished to pay off the loan, and your credit score is greatly affected.
If you are in default, you have a few options to correct, or start to correct, the problem. If you have the financial resources, the first option would be to pay the full amount of the defaulted loan. If this is not a possibility, individuals can enter into a loan rehabilitation program. Most programs require nine monthly payments, each made within 20 days of their due date, all within the period of ten consecutive months. Payment amounts are usually based on 15% of your discretionary income. Once the rehabilitation program is completed, the default status is lifted.
When your loans are under deferment, you have technically put them on pause. This can occur if you return to school (for a graduate degree, do instance), or are in the military. During this period, interest does no accrue on subsidized loans, however it does on unsubsidized loans. Borrowers must apply for deferment directly with their loan provider.
If the process is confusing, you are more likely to not take the proper steps to repay the loans. Being educated on important terms and policies can assist students in better understanding loan repayment and consequences. To that end, here are some more frequently used terms when it comes to student loans.
- Annual percentage rate (APR): the interest connected to the loan.
- Borrower: the individual who has signed the loan agreement and is responsible for loan repayment.
- Consolidation: combining two or more loans into a new, single loan.
- Forbearance: postponing or extending loan payments (while still accruing interest) due to a personal hardship.
- Interest: a percentage of your loan balance that is charged by the lender during the course of your loan repayment.
- Lender: the financial provider of the loan.
- Principal: the full amount borrowed. When a student is still in repayment, the principal is the amount that is still to be paid.
- Promissory note: a legally binding contract between borrower and lender with the terms of the loan.
The Dangers of Defaulting on Student Loans
Colleges that place importance on preparing their students for the workforce and world in order to best pay off their student loan debt are still up against increasing numbers of students who take out loans for school. In the U.S. alone, there are 44 million borrowers, totaling $1.3 trillion in student loan debt. Student loan rates are up, and the average graduate from the class of 2016 left campus with their diploma and $37,172 in loans to pay off. Nationwide, the student loan default rate is at 11.2%.
A 2012 edition of The Economist stated that “rising fees and increasing student debt, combined with shrinking financial and educational returns, are undermining at least the perception that university is a good investment.” A post-secondary education is becoming more and more expensive, leaving students to question how much the cost is worth, or being unable to manage the cost once they graduate.
When a student does not pay their loans for more than 270 days, they are considered in default. High student loan default rates can cause a wide array of negative consequences, from the smaller inconveniences like constant phone calls from creditors, to life-altering repercussions like wage garnishment.
These effects go beyond just the money, too. A 2014 Gallup Poll identified five main areas in which students with high levels of debt fall behind their counterparts without loans:
- Purpose, or being motivated and liking what you do every day
- Social, or having beneficial relationships in your life
- Financial, or being able to manage your economic life
- Community, or having pride in where you live
- Physical, or being in good health with high levels of energy
Gallup found that students with more than $50,000 in student debt had decreased well-being, especially in the area of physical health, than that of those without loan debt. The American Student Assistance nonprofit, after conducting a study of nearly 1,000 participants, reported that 40% of students they questioned cited that student loans had impacted their health, and in multiple ways. First, the stress and worry that comes with the ownership of a large student loan can take their toll on a person’s health. Enough of it can impact sleeping and eating habits, and if it gets too much, can also lead to depression. This can create a snowball effect: less sleep means less productivity and motivation, which can lead to poor work performance.
Health is also a factor when it comes to student loan debt, as individuals are often tasked with deciding where to spend their money. Many times, the doctor is put off in favor of using limited resources somewhere else. Individuals might also place less priority on expensive health insurance or forego it altogether.
Defaulting on student loans can also impact your job prospects. Local, state, and federal agencies will not hire anyone who has defaulted on a student loan. Industries outside of the government often look at loan histories, too, as a way of weeding out candidates. The Society of Human Resource Management reported that 47% of employers engage in background checks of potential employees, to prevent “criminal, unreliable, or financially irresponsible candidates from being hired.”
Student loan debt also makes a negative impact on the economy at large. It reduces the amount of spending a person does. A 2015 study found that individuals with student loan debt have postponed buying a house (41%) and delayed plans to move to a larger city. Participants also cited potential plans for decreased spending in the future to help pay off loans, including cancelling gym memberships, foregoing regular haircuts, and reducing social activities with friends and family.
It also inhibits new businesses. A 2015 Gallup study found that one in five borrowers have postponed plans to start a business. And for those still willing to try, they might have a harder time receiving a business loan, as student debt can affect credit scores.
There are consequences to defaulting on loans, but there are also helpful tips and resources to keep you from getting to that point. First, don’t borrow more than what you need for college, and make sure the amount is in line with what you think you can pay back. Be sure to consider colleges with low loan default rates. If you can, start making small payments while you’re still in school (every bit helps!). If you know your proposed repayment plan is unrealistic, work with your provider to make it more manageable, so you aren’t behind the eight-ball before payments even begin. When it’s time to get your first job after college, take special note of companies who offer student loan benefits, like matching your monthly payment.
Student loans are often a necessary reality to complete a quality college education, but make sure to be prepared for repayment and loan management when you finish school. Completing a college degree should be a time of celebration and a promising new chapter in your life. Keeping your loans in check and taking steps to manage payments will help ease the transition from college to career and beyond.