Student Loan Default Rate Soars in ’85 : Officials Forecast $1-Billion Problem, Worse Years to Come

Education Secretary William J. Bennett said today that government payments on defaulted student loans will top $1 billion this fiscal year, up more than 25% from last year.

Bennett, who urged Congress to pass legislation reducing federal liability for defaulted loans, said budget analysts project higher and higher default rates in the years to come.

In a statement, he said the analysts project that the default rate on federally guaranteed student loans will jump from last year’s 10.7% to 11.7% this fiscal year and 13.6% by 1990, which he called an “alarming” increase.

“The financial implications of such an increase in the default rate are staggering,” Bennett said.

By the end of this fiscal year on Sept. 30, analysts project that the government will have paid out $1.085 billion for defaulted loans, compared to $749 million in 1984, officials said.

Slight Decline After 1980

The default rate declined slightly each year since 1980, when it was 12.5%, until 1984, according to department figures.

“Ultimately, the costs of a high default rate by current students must be borne by the taxpayers and by students seeking loans in the future,” Bennett said.

The default rate apparently has increased for a variety of reasons, said Tyndall Greene, a program analyst in the Office of Budget, Planning and Evaluation. But she said an increase in the volume of student loans in recent years--from $1.9 billion in 1978 to $7.8 billion in 1981--is probably a major factor.

“We do know most defaults occur in the first couple of years of repayment,” she said.

Bennett urged Congress to approve pending legislation that would require state lending agencies to redouble efforts to collect overdue loans and to prevent defaults.

Less Reimbursement

Under the legislation, the state agencies would be reimbursed for only 90% of a defaulted loan. Current law provides for full reimbursement.

The proposal means the state agencies “would pay a cost for every single default,” Greene said. “It would be a real incentive for them to prevent defaults and try to collect on defaults.”

The legislation also would extend the statute of limitations for collecting bad loans and require the state guarantee agencies to report defaulters to credit agencies.

Bennett said the department was also considering proposals to require private lenders to bear some portion of the default risk and to limit eligibility to students who do not have a bad credit history.