The decline in student loan default rates are credit positive for U.S. higher education and are likely to continue to decline, according to an October 8 credit outlook report from Moody’s. However, Moody’s also cited the expiration of the Perkins Loan Program as credit negative and said it will likely hurt institutions that serve low-income students.
The Department of Education last month released the most recent three-year cohort default rate (CDR), which showed a decline from 13.7 percent for the FY 2011 cohort to 11.8 percent for the FY 2012 cohort. The decline for the second consecutive year occurred even while greater numbers of borrowers entered repayment, according to Moody’s.
The investor group dubbed the decline as “credit positive,” noting that it “reduc[es] demand risk arising from questions about the value of a degree and more adverse sanctions resulting from high default rates.”
As the country’s unemployment rate continues to slowly decline and borrower participation in deferral and income-based repayment programs continues to rise, Moody’s predicts that default rates will continue to fall from the peak of nearly 15 percent reported in 2013 for the FY 2010 cohort. However, community colleges, for-profit institutions, and schools with large low-income student populations will continue to see credit risk related to high default rates. As will schools that have low graduation rates and rely largely on federal financial aid, the report said.
Moody’s also gave the October 1 expiration of the Perkins Loan Program – which Congress failed to extend at the end of September -- a negative credit rating, noting that its “disappearance … will contribute to greater pressure on university financial aid budgets and enrollment volatility.”
Perkins loans comprised a “relatively small” share of the total federal student aid, making up only $1.2 billion compared to $150 billion in total federal financial loans and grants. Its expiration will have the most impact on institutions with modest financial reserves for institutional aid that serve students with high financial need, such as small colleges and stand-alone graduate schools, according to Moody’s, which noted that the program was the “last remaining federally subsidized loan for graduate students and provided aid to high-need undergraduate students.”
Publication Date: 10/19/2015