And once again, those who attend for-profit colleges and universities were the most likely to default.
The grim numbers are no surprise, given that the timeframe roughly aligns with the start of the recession. But they come at a politically charged time, as for-profit colleges fight proposed regulations that would cut off federal aid to some programs if too many students default on loans or don't earn enough after graduation to repay them.
Figures from the U.S. Department of Education show 7 percent of borrowers of federal student loans defaulted within two years of beginning repayment, up from 6.7 percent the previous year and 5.2 percent the year before that.
Default rates crept up in all sectors of higher education from 3.7 to 4 percent for private nonprofit schools, 5.9 to 6 percent for public nonprofit schools, and 11 to 11.6 percent for for-profit schools.
The data covers borrowers whose first loan repayments came due between Oct. 1, 2007, and Sept. 30, 2008, and who defaulted before Sept. 30. 2009.
"Even before the economy went down, student borrowing had doubled in this decade," said Patrick Callan, president of the National Center for Public Policy and Higher Education in San Jose, Calif. "More students borrowed and they borrowed more money, and they're now they're going out in a very tough economy."
The Education Department underscored the for-profit default rates. Education Secretary Arne Duncan, repeating what has become his mantra on the fastest growing segment of higher education, voiced concern about excessive debt and useless degrees while simultaneously highlighting the sector's positive contributions.
Students at for-profit schools represented 26 percent of federal loan borrowers and 43 percent of all defaulters in 2008-09, the department says.
Citing those figures and the sector's rapid growth, the department has proposed a complicated aid eligibility formula that would weigh both the debt-to-income ratio of recent graduates and whether all enrolled students repay their loans on time, regardless of whether they finish their studies.
The department was flooded with more than 80,000 comments on the proposed regulations in a public feedback period that closed last week. For-profit colleges argue the government is soft-pedaling the potential harm and say the changes would disproportionately hurt minority students.
Harris Miller, president and CEO of the Career College Association, which represents for-profit schools, said the major factor driving defaults is not an institution's tax status but student demographics. For-profit colleges accept higher-risk and lower-income students, and Harvard would have higher default rates if it did the same, he said.
Experts caution that the two-year rate does not provide a full picture and many more students default in subsequent years. The Education Department is moving to a three-year rate to determine schools' eligibility to take part in taxpayer-supported student aid programs.
Donald Heller, director of Penn State University's Center for the Study of Higher Education, also cautioned against comparing for-profit college default rates with those at all public and private colleges. He said it's more accurate to stack them against community colleges, which are closer to for-profits in programming and student makeup.
By that measure, for-profits still have default rates that are worse, but it's closer. The default rate for students at public two- to three-year programs which covers the vast majority of community colleges was 10.1 percent in fiscal year 2008, the new data shows. At for-profit schools, the rate was 12.6 percent in two- to three-year programs.