Widgets Magazine

Loan default rates see little change under new federal law

Student loan defaults at Stanford remain low, but a regulatory change prompted by the Health Care and Education Reconciliation Act requires universities to measure their default rates over three years instead of two, which could reveal more students missing payments. Under this new calculation, Stanford’s three-year default rate is 1.3 percent, which misleadingly appears to have increased from its two-year default rate of 0.8 percent, despite the fact that overall default rates have not changed.

The default rate is the ratio of students who have defaulted against those who took out loans. The U.S. Department of Education requires these statistics, and high default rates could affect colleges’ and universities’ access to federal funds.

Financial aid director Karen Cooper said Stanford was “well within the established parameters for responsibly managing federal funds.

“Across our whole population, we can essentially count on two hands the number of students who have gone into default after entering repayment within their first three years,” she said.

Recent adjustments to federal law may obscure this fact.

“Now because you’ve expanded it to a three-year cohort, the calculation goes up a little bit, but I don’t think it’s a reflection that Stanford students as a whole are going to see a drastic increase in defaults,” said Jack Edwards, director of financial aid at the Graduate School of Business (GSB).

Typically, it takes 10 years to repay a student loan making the minimum payments.

“Adding that one more year to the calculation gives you a bigger window into what’s going on with your students,” Cooper said.

The number of undergraduate students who take out loans in the first place has fallen from between 2,000 and 2,500 students to between 900 and 975 students since the 2008-09 school year. Just over 1,900 graduate students have taken out loans, a number that has been “pretty steady” for the last four years, Cooper said.

Edwards noted that about 60 percent of GSB students take out loans and that the default rate is consistently under one percent.

“They understand how it can impact their credit, so they are very conscious of it. They are business students, so they pride themselves of having excellent credit.”

Cooper said Stanford’s relatively low default rate isn’t closely related to work done by the financial aid office. She attributed this success to “the quality of students” at Stanford and “the fact that they really do find good job opportunities once they leave.”

As students graduate, the financial aid office offers them an in-person meeting to discuss loan programs and repayment options and provides an online counseling tool.

“[We do] a lot of work to prevent students from going into default,” Edwards said. “They have the option of always coming back to us to talk about it.”

Students who do default are typically “having very difficult economic situations,” Cooper said. “They may not have finished their degree,” she added. “This doesn’t happen to very many students, but a few who drop out and want to do other things…get out of sync with the student world and repayment.”

Defaulting on loans makes it difficult to qualify for credit in the future. On the flipside, if students keep up with their payments, they can build a good credit history.

“It’s the only loan you can get when you are 18-years-old and have no credit history at all that will happily give you $5,000,” she added.