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Instant Analysis of New Student Loan Default Report

The U.S. Department of Education will report Wednesday that the national student loan default rate jumped 13.3% last year, going from a historic low of 4.5% to 5.1% for the year ending September 2005. Why?

Two key factors are driving an increase in the national student loan default rate.

First, the cost of higher education has been increasing rapidly over the last five years. Tuition at 4-year public colleges rose 56.5% during that time, from an average of $3,508 to $5,491, according to the College Board. When combined with stagnant federal grant aid, college cost increases have created an explosion in student debt. Students now borrow 108% more than they did a decade ago, with two-thirds of four-year students graduating with student loan debt totaling almost $20,000 each, according to the Project on Student Debt.

Second, despite the explosion in debt, in the recent past student loan default rates have gone down because of low interest rates. Fixed consolidation loan interest rates bottomed out at 3.4% in the year covering July 2004 to July 2005. Cohort default rates bottomed out for the corresponding reporting period. But for the year stretching from July 2005 to July 2006, the fixed consolidation loan interest rate went up to 5.3%. Corresponding with that increase in interest rates, we are beginning to see an increase in the student loan default rate.

More danger lurks ahead, because Congress raised interest rates for the year beginning in July 2006 to 6.8% for consolidation loans. Accordingly, we may see an even higher default rate this time next year, because of increased student loan interest rates set by the government. A higher student loan default rate means higher costs to taxpayers, since the government guarantees student loans against default.

Don't be fooled by the spin. Wednesday's college loan default rate numbers are not good news for students or taxpayers.