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More Default Danger Ahead

July 18, 2011

BOSTON -- For student aid administrators, few factors are as seemingly unpredictable -- and as important -- as the cohort default rate, which measures how many students default on their loans in the first years after graduation.

Next year, when the government starts measuring the percentage of student borrowers who default on their loans in the first three years after entering repayment, rather than the two currently used for measurement, those rates, which help determine which colleges’ students are eligible for federal financial aid programs, are expected to increase for many institutions.

At the annual conference of the National Association of Student Financial Aid Administrators, which began here on Sunday, college financial aid officers discussed ways to prevent students from defaulting and the factors that might lead them to stop making payments on their loans. While they recommended several strategies, including financial literacy classes, advising students to borrow as little as possible and requiring counseling sessions for those who are borrowing a large amount of money, they also said that many of the factors that go into defaults are ultimately outside of institutions’ control -- except for one.

Students who complete college are far less likely to default than are those who drop out, said Jacob Gross, policy and planning research analyst at the West Virginia Higher Education Policy Commission. “The most important thing we can do to help students not default is to help them finish their credential,” Gross said at one of two default-rate sessions Sunday.

The other factors that go into loan defaults are complicated and frequently interrelated, he said: low-income and minority students are more likely to default than white students or those from wealthy families. Students at for-profit colleges or colleges where they study for less than four years are at higher risk as well. Single parents, or those who are separated, divorced or widowed, are less likely to pay back their loans.

And, in a statistic that several financial aid officers said was surprising, older students are more likely than younger students to default (at least those seeking bachelor’s or associate degrees).

A study in West Virginia found that students who received Pell Grants were more likely to default at four-year institutions, but not at two-year colleges. At community colleges, those with a high proportion of minority students also had higher default rates, but the opposite was true at four-year institutions. The findings highlighted the complicated nature of measuring default, and the only consistent statistic was the relationship between graduation rates and default rates, Gross said.

At both sessions, financial aid officers said they were frustrated by the regulations and the task of dealing with students who -- despite what the administrators say are their best efforts -- sometimes don’t grasp that loans must be repaid.

Adding to that frustration was the fact that many factors that make students likely to default are hard to change: race, ethnicity, income, family circumstances. “There isn’t a lot you can do in your day-to-day work” to deal with those structural issues, Gross said. The presenters tried to focus on achievable goals.

Students should be discouraged from borrowing more than they need, especially in unsubsidized or private loans, said Kathy Bialk, director of student aid and financial assistance at Marshall University. She also said colleges should be “discreet” about private loan options to ensure that few students take advantage of them.

At a separate session, Angie Hovatter, the director of financial aid at Frostburg State University, suggested more extreme steps that institutions could take, including mandatory counseling for students who want to borrow more than $30,000 or a “bare-bones budget” that would lead students to believe they need less money for college life than they actually would, leading them to borrow less.

Student aid administrators present at both sessions said during the discussions that, given the relationship between default rates and graduation rates, the rest of the faculty and administrators should be involved in stopping student defaults.

The shift to three-year default rates next year will highlight problems, even at institutions that think they are doing well, Bialk said. “The three-year rates will display realities,” she said.

 

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