Don't Blame the Weather

On Tuesday the Department of Education released its annual report on student loan default rates. Under their official calculations, the rate jumped from 4.6 to 5.2 percent. In the press release announcing the increase they attribute the rise to Hurricanes Katrina and Rita. Media coverage bought this line, most obviously the Chronicle of Higher Education, which titled its story ($), "Hurricanes Blamed for 13-Percent Jump in Student-Loan Default Rate," without questioning whether this assertion were true. It's not, and here's why:

To begin with the most minor but the most obvious criticism, the timing is off. In Secretary Spellings' press release she attempts to help news writers understand which students were counted in this year's default rates. She explains:

The FY 2006 default rates represent the percentage of borrowers in the Federal Family Education Loan and William D. Ford Federal Direct Loan programs who began loan repayments between Oct. 1, 2005, and Sept. 30, 2006, and who defaulted before Sept. 30, 2007.

Hurricane Katrina hit the Gulf Coast on August 29, and Rita came on September 24, 2005, so technically the cohort Secretary Spellings is talking about had not yet entered repayment. Default rates are currently calculated as the percent of students who enter repayment in a given year who, two years later, have been more than 270 days late for a payment. We know that student loan defaults rise linearly at a pretty steep clip for the first five years, so there's no particular reason the 2006 cohort, who would have been impacted by the storms during their first year of payments, should have struggled any more than the ones from 2005, who were in their second year of being counted.

Second, the default rates in hurricane-ravaged states simply are not the problem. Here's a graph I assembled using the Department of Ed's own data. The blue line represents student loan defaults from all colleges and universities in Louisiana, Mississippi, and Texas--the states hardest hit by the hurricanes. The red line represents the number of student loan defaults nationwide. Total defaults increased a lot faster than the ones in hurricane-ravaged states, making Spellings' claim more than dubious. Which brings us to the real issue: while the student loan default rate, as currently calculated, remains "historically low," as the Dept. of Ed put it, the number of loans continues to skyrocket. Look at the graph below and decide which line looks out of place. The blue and red lines are the same as in the first graph, but I've added lines for the total number of borrowers entering repayment for those particular states (yellow) and for the US as a whole (green).
The 2006 cohort of students broke the record of the number of students entering loan repayment, set the year before. We had nearly four million citizens who began paying student loans in 2006. That's twice as many as ten years ago.

Instead of talking about the "historically low" student loan default rate, we need to shift the conversation to a more realistic picture. A 2003 report from the Department of Education Inspector General suggested looking at the lifetime of the loans, especially given their evidence that the default rate is more like 20-30 percent at four-year colleges and 40-50 percent at for-profit institutions. Granted, the recent Higher Education Act reauthorization did take us a step in the right direction by changing default rates from two to three years time, but that's a far cry from a ten year or a lifetime analysis. The number of students on loans continues to escalate, and we need a better measurement tool to compensate. And we certainly can't blame the weather.