The president’s fiscal year 2016 budget out this week is projecting fantastic economic growth over the next decade, but one piece of the puzzle refuses to fit — student loan defaults.
The Department of Education‘s budget documents project that 25.3 percent of undergraduate Stafford loans (measured by dollars, not numbers of loans) issued next year will default at some point during the borrower’s repayment term. That is a full 2.5 percentage points from what the agency projected last year for the previous cohort of loans. And it is a large uptick given that those projections typically don’t move much from year to year
Every other student loan category also shows an increase in projected default rates. For Parent PLUS loans, it is 2 percentage points higher, now at 10.6 percent. On the graduate student side, while the Obama administration seems to be accounting for the fact that many more graduate students will take advantage and reap the benefits of the generous terms of Income-Based Repayment and Public Service Loan Forgiveness, default rates for graduate Stafford and PLUS loans are still projected to increase
The Obama administration has not explained what is behind these new numbers. Meanwhile, trends that might help explain the projected increase are actually pointing in the other direction. The maximum Pell Grant for low-income students will reach its highest level ever in 2016. Enrollment in affordable repayment plans such as Income-Based Repayment is increasing rapidly as the administration continues to aggressively promote them. Interest rates on loans issued in 2016 will likely be lower than those issued the year before. Even the favorite whipping boy for student loan issues, the for-profit college industry, will take the smallest share of federal student loans in years, according to the president’s budget.
Maybe analysts at the Department of Education see trends in the way older loans are performing that suggest defaults on new loans are likely to come in higher, despite a rosy economic outlook, generous federal grants, tax benefits, and loan repayment terms. It may be that we are entering a new era of high default rates on student loans regardless of the strength of the economy or the size of government benefits.