A New York Fed study shows that cumulative default rates for students who graduated or left school in 2009 are much worse than those who finished school before the crisis

A few days ago we reported that student loan delinquency rates continue to rise, reflecting the rising expense of a college education and the disproportionate impact of the financial crisis on young people. But when you break the aggregated data apart by years since leaving school, as New York Fed senior economist Meta Brown and her colleagues didn’t in a recent study, it shows that default rates are likely to keep getting worse for the next four or five years.

“We haven’t seen the full picture of 2009 borrowers who will default. Our calculations indicate a 19 percent three-year default rate for this 2009 cohort; but two years later, an additional 7 percent of borrowers have defaulted. The pattern for earlier cohorts strongly suggests that this rate will continue to rise,” she writes.

student loan default by cohort

Student loan: Recent graduates have much higher default rates

Strictly speaking, the cohorts that Brown uses don’t indicate when a person left school, but people usually start repaying their loans (how the cohorts are actually divided) once they leave school so it’s a reasonable proxy. She then measures the percent of borrowers in each cohort who have ever been in default (at least 270 days past due), which necessarily increases over time reaching around a third for most cohorts (37% for the entire population, already a surprisingly large figure).

But people who started repaying in 2009, students who either graduated or left school to find a barren job market, have already reached a 26% cumulative default rate five years out, compared to 25% for the 2005 cohort which is nine years into repayments. It’s possible that the cumulative default rate will flatten out in the next few years (ie people who would have defaulted anyways just did so earlier), but Brown expects to keep rising.

Students with less debt more likely to default

Default rates are also closely tied to the principal balance, but probably not in the way you would expect – people who borrowed more are less likely to default. This is important because it means that, as much as you may like to rail against top tier schools for charging exorbitant sums, their students aren’t the ones who usually go under.

Instead, it’s the students who have less than $5000 in debt when they leave school that are most likely to go into default at some point. The NY Fed study doesn’t have a breakdown by type of institution, but you have to imagine that includes a lot of the students who churn through for-profit colleges with private loans.

student loan defaults by balance