The average student loan default rate is a closely watched statistic because it’s an indicator of how big of a problem the $1.56 trillion in outstanding student loan debt owed by Americans represents. According to the latest numbers from the Department of Education:
The short-term default rates above measure how well students are doing repaying their loans during a three-year window after they leave school.
Only borrowers who began paying back their loans between Oct. 1, 2014, and Sept. 30, 2015, and defaulted before Sept. 30, 2017, were included in the latest count. The Department of Education considers a student loan to be in default if the borrower has failed to make a payment for more than 270 days. But borrowers aren’t included in these official default statistics unless they’ve gone 360 days without making a payment.
Three-year default rate by state
Three-year default rates are also used to monitor the performance of colleges and universities. If a school’s three-year default rate is 30% or higher, it must submit a plan to the Department of Education identifying the contributing factors. Schools can lose their eligibility to accept federal student aid if their three-year default rate stays at or above 30% for three years. Schools can also lose eligibility for federal funding if their default rate hits 40% for one year.
You can look up the three-year default rate of any school that’s eligible to accept federal student aid.
Default rates vary by state due to a number of factors explored in more depth below, including variations in wealth and other demographic factors, and the mix of public, private and for-profit schools.
10 states with the lowest three-year default rates
- Vermont (5.9%)
- Massachusetts (6.1%)
- North Dakota (6.2%)
- Rhode Island (6.5%)
- South Carolina (7.0%)
- Nebraska (7.9%)
- Minnesota (8.1%)
- Utah (8.3%)
- District of Columbia (8.5%)
- New York (8.5%)
10 states with the highest three-year default rates
- West Virginia (17.7%)
- New Mexico (16.2%)
- Nevada (15.3%)
- Kentucky (14.3%)
- Indiana (14.2%)
- Mississippi (14.1%)
- Arizona (13.1%)
- Alabama (12.9%)
- South Dakota (12.9%)
- Oregon (12.8%)
Three-year default rates for students who have recently graduated or left school are at an all-time low since the Department of Education started using that measure in 2012.
But the longer student loan borrowers are in repayment, the more chances they have of encountering unexpected financial difficulties that can lead to default.
Total student loan dollars and borrowers in default
Despite the improvements in three-year default rates, the total number of borrowers and dollars in default continues to grow.
The chart above shows that in less than two years the:
- Total dollar volume of federal student loans in default:$135 billion (36% increase since Sept. 30, 2016)
- Total number of borrowers in default: 7.1 million (14.5% increase)
The chart above illustrates that most borrowers are either repaying their loans or haven’t entered repayment yet because they’re still in school. But defaults aren’t the only sign that borrowers are having trouble. A significant number of borrowers (6.1 million) have also requested loan deferment or forbearance.
As of June 30, 2018:
- 47.2% of outstanding federal student loan balances were in repayment — that’s $669.1 billion in loans held by 19.2 million borrowers
- 17.4% of loans were in default — $135 billion in total
- 15.7% of student loans were held by borrowers who were still in school — $118.3 billion in loans held by 6.4 million borrowers
- 8.6% of loans were in deferment — $122.1 billion in total
- 6.4% of student loans were in forbearance — $113.2 billion in total
- 3.9% of student loan debt was held by 1.6 million borrowers who were still in their 6-month grace period — $39.5 billion in loans
Higher loan balances, fewer defaults
Although it might seem counterintuitive, borrowers with lower loan balances account for most short-term loan defaults. But it makes sense when you consider the high rate of default among borrowers who don’t get a degree.
The chart above illustrates that:
- Borrowers who owe less than $10,000 account for 66% of defaults that occur in the first three years of repayment
- Borrowers with more than $40,000 in student loan debt account for just 4% of defaults
Private student loans less prone to delinquencies
Unless the student has established credit and earnings, most private student loans are cosigned. That, along with the economic recovery that followed the Great Recession of 2007-2009, helps explain why the number of private student loan borrowers who get behind on their loans is low and continues to fall.
The chart above shows the following:
- Delinquency rates for undergraduates: 1.48% (as of March 31, 2018)
- Delinquency rates for graduate school borrowers: 0.78%
Getting a degree reduces the odds of default
Students who complete their degrees are generally able to repay their student loans when they graduate, particularly if the total amount they’ve borrowed doesn’t exceed their annual earnings.
It’s students who drop out — or attend schools that don’t give them marketable job skills — who tend to have the most trouble.
The chart above illustrates that students who take out loans but don’t earn a degree are nearly six times as likely to default as those who earn a bachelor’s degree. Students who earn certificates in fields ranging from cosmetology to welding are almost as likely to default on their loans as students who don’t get a degree.
Among students who began school for the first time during the 2003-04 academic year, the percentage who defaulted on their loans during the following 12 years breaks down like this:
- Bachelor’s degree: 7.9%
- Associate’s degree: 21.9%
- Undergraduate certificate: 44.3%
- No degree: 44.5%
For-profit schools have the highest default rates
Whether it’s because students often fail to complete their degrees, or don’t obtain skills that are valued by employers, borrowers who attended for-profit schools default on their loans at about four times the rate as those who attend public or private nonprofit schools.
The chart above shows that, among students who began school for the first time during the 2003-04 academic year:
- 17.4% of students who attended a public, 4-year college defaulted within 12 years
- 17.6% of students who attended private, nonprofit colleges defaulted
- 25.8% of students who attended a public, 2-year college defaulted
- 52.5% of students who attended a for-profit school defaulted within 12 years
Low-income families have higher default rates
Since low-income families are more likely to borrow and less likely to get help repaying their loans, it’s understandable that students from low-income families would have higher default rates than those who come from more affluent backgrounds.
The chart above shows that in terms of income:
- Students from the wealthiest one-fourth of families have the lowest long-term default rate of 13.6%
- Students from the upper-middle quarter of families have a 22.1% default rate
- Students from the lower middle one-fourth of families have a 28.2% default rate
- Students from the one-fourth of families with the lowest income have the highest long-term default rate of 41%
Income-driven repayment plans can help you avoid default
It’s becoming much easier to avoid defaulting on your federal student loans, thanks to income-driven repayment (IDR) plans that let you pay 10% or 15% of your discretionary income each month. If you have no discretionary income, your monthly student loan payment in an IDR plan is zero. One problem with these plans is you may end up paying a lot more in interest if you stretch your payments out over many years and don’t end up qualifying for loan forgiveness.
The availability of IDR plans means that default rates may no longer be a good a yardstick for assessing school performance. There’s some thought that it would make more sense to look at the percentage of borrowers who successfully repay their loans (and how long it takes them to do that).
When researching colleges, the Department of Education’s College Scorecard website lets you check the percentage of students at any school who have been able to pay down at least one dollar in principal within three years of leaving school. A recent analysis by the Center for American Progress concluded that most students (55%) either default or are unable to pay down any of their loan principal within three years of entering repayment.
Avoiding student loan default
Students who are still in school should not only keep a close eye on how much they borrow, but what’s happening with interest rates. After you take them out, rates on federal student loans are fixed for life. But rates on new loans are adjusted annually to reflect the government’s cost of borrowing.
Federal student loan rates have gone up for two years in a row and could continue to rise. That means your monthly payment and total repayment costs could turn out to be more than you’d planned on. But once they’ve landed jobs and established credit, many graduates are able to refinance their student loans at lower interest rates.
To help you get a better grasp of the numbers, we’ve provided the sources for all the statistics we cite to help anyone from journalists to students.
All of the charts in this article are free for you to share or embed on your own website, blog, or research paper.