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FOR RELEASE: a.m. papers Contact: Stephanie Babyak September 2, 1994 (202) 401-2311 or Jane Glickman (202) 401-1307
The costs associated with defaulted student loans have declined for the third straight year, reducing taxpayers' burden by millions of dollars, U.S. Secretary of Education Richard W. Riley announced today.
National default rates also have dropped substantially, from 22.4 percent in fiscal year 1990 to 15.0 percent in 1992, he said. The FY 1992 default rates are the most current data available and represent a snapshot in time of borrowers scheduled to begin loan payments in FY 1992 and who defaulted in either that year or the following year.
In releasing default rates for each of the 8,504 schools that participate in federal student aid programs, Riley said, "After years of rising defaults, it's going the other way. We can see substantial progress through the cooperative efforts of Congress, schools and the Education Department. Yet, more progress needs to be made."
The U.S. Treasury will pay out an estimated $2 billion to cover defaulted student loan costs in the current fiscal year (FY 1994). Default costs hit an all-time high of $3.6 billion in FY 1991, but have dropped steadily each year since.
A substantial increase in collections this year should help reduce costs further, Riley said. In FY 1994, the department will collect more than $500 million on both old and newly defaulted loans, a 189 percent increase over last year's collections ($173 million). As a result, the net default costs will be an estimated $1.41 billion this year.
Increased collections are attributed to more effective collection methods, reflected by indicators such as a four-fold increase in the amount of money collected from federal income tax refunds withheld. This year, the department also began collections on many of the 1 million accounts assumed from the now-defunct Higher Education Assistance Foundation (HEAF), once the largest guarantor of student loans.
Riley attributed the decline in defaults to a number of factors, including tougher oversight and the department's default reduction initiatives. For example, schools are required to discourage defaults through efforts such as providing borrowers with financial counseling. Penalties for default also are tougher.
The department has statutory authority to take sanctions against schools with high default rates; schools have the right to appeal. The Higher Education Amendments of 1992 (P.L. 102-325) mandate that schools with default rates of 25 percent or greater for three consecutive years face loss of eligibility in the Federal Family Education Loan Programs. This year, 447 schools are affected by this provision. Historically Black Colleges and Universities are exempt from sanctions until July 1998.
In addition, under department regulations, a total of 376 schools with FY 1992 default rates greater than 45 percent, or greater than 40 percent without a reduction of at least 5 percentage points from the previous year, may have thei eligibility to participate in all federal student aid programs, including the Federal Pell Grant Program, restricted or terminated.
Riley said President Clinton's direct loan initiative will make it easier for borrowers to avoid default through a range of flexible repayment options, including one based on income. More than 100 schools now offer direct loans, and more than 1,000 additional schools have been accepted into the program for the next academic year.
Defaulters also face serious sanctions. In addition to federal income tax refund offset, they become ineligible for further federal student aid (both loans and grants), risk being denied credit cards or other loans, and may have their wages garnished.