The student loan default rate has climbed during the past few years, and it is expected to continue to go up. And, just as default rates vary among institution type (public university, for-profit college, etc.), some states have higher default rates than others.
The Department of Education recently released the two-year and three-year national cohort default rates, showing that borrowers are increasingly defaulting on their loans within two and three years of entering repayment.
Starting next year, the Education Department will sanction schools based on their three-year cohort default rate, meaning a high percentage of student borrowers who default will jeopardize a school’s eligibility for federal financial aid programs.
As such, schools have an interest in keeping their default rates low, something that hasn’t gone well at for-profit colleges. They have the highest default rate among higher education institutions, with 21.8% of borrowers defaulting within three years of beginning repayment.
From a geographic perspective, default rates are highest among borrowers who attend schools in the South, West and Midwest. The state data released by the Education Department covered two-year default rates, the highest of which was 15.4% for New Mexico schools. The lowest was in North Dakota, at 4.3%. The national two-year default rate for loans entering repayment in 2011 was 10%.
States With the Highest Student Loan Default Rates
10. Mississippi — 11.5%
9. Ohio — 11.6%
8. Texas — 11.8%
7. Arkansas — 12%
6. Oklahoma — 12.1%
5. Iowa — 12.3%
4. Kentucky — 12.9%
2. Tie: Arizona and West Virginia — 13.6%
1. New Mexico — 15.4%
Not only is this bad news for schools, it’s detrimental to credit health of young college graduates. Defaulting on any loan will hurt a consumer’s credit score, which in turn may make it more difficult to qualify for other forms of credit. And if those individuals can get credit, it will likely be at higher interest rates than people with better scores pay.
Such financial obstacles can translate into reduced earning and spending power, affecting overall economic health. As a result, it is crucial for students to borrow only what they can afford to repay, which experts recommend is less than the new graduate’s expected first-year salary.