Default Rates Projected to Soar

U.S. data show proposed change in student loan default calculation would send rates higher, troubling for-profit colleges.
January 21, 2008
 

Supporters and critics of a Congressional proposal to alter how the U.S. government calculates the rates at which student borrowers default on their government backed loans have speculated that the change would significantly increase the rates -- causing more colleges to run afoul of rules designed to punish institutions with high rates.

New data from the U.S. Education Department confirm that view.

In November, the House of Representatives amended legislation to renew the Higher Education Act with a provision that would extend to three years, from the current two, the “cohort default rate,” which gauges the proportion of student loan borrowers who default within a certain time period after they leave college.

The change, proposed by Rep. Timothy Bishop (D-N.Y.) and Rep. Raul Grijalva (D-Ariz.), is designed to make the cohort default rate a more realistic assessment of how individual institutions (and lenders) are faring in keeping student borrowers on track to repayment, both to gauge students' indebtedness and potential failure by colleges in ensuring that their students are getting an affordable and valuable education.

Based on previous studies and reports, lobbyists and others estimated that adding a third year to the time period in which defaults were tracked could increase default rates by an average of 60 percent, putting more institutions at risk of penalty by the Education Department. Colleges that have a cohort default rate of 25 percent for three consecutive years or 40 percent for any one year lose access to federal student aid funds, and the department can impose restrictions on the ability of institutions to receive and disburse funds if their rates exceed 10 percent

As seen in the table below, which is based on Education Department data from the 2004 fiscal year, the average rate would nearly double for for-profit colleges and increase by between 50 and 75 percent for most other types of institutions.

Projected Impact of Change in Default Rate Formula by College Sector

Institution Type Projected 4-Year Rate Projected 3-Year Rate Current 2-Year Rate
Public 9.5% 7.2% 4.7%
--Less Than 2-Year 14.1 9.7 5.7
--2- to 3-Year 16.6 12.9 8.1
--4-Year or More 7.1 5.3 3.5
Private 6.5 4.7 3.0
--Less Than 2-Year 26.7 18.7 9.0
--2- to 3-Year 16.2 12.2 7.4
--4-Year or More 6.2 4.5 2.8
Proprietary 23.3 16.7 8.6
--Less Than 2-Year 26.6 18.5 8.9
--2- to 3-Year 27.2 19.5 9.9
--4-Year or More 19.2 13.7 7.3
Foreign 3.4 2.5 1.5
Unclassified 10.0 10.0 5.5
Total 11.9 8.6 5.1

Source: Education Department

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Not surprisingly, the numbers greatly trouble for-profit colleges, and the Career College Association, which represents those institutions, has urged its members to argue aggressively against the proposed legislation, which they note would raise rates "much higher than any previous estimate."

The group's talking points, while clearly focusing on the measure's projected impact on career colleges themselves, encourages officials at its member colleges to focus as well on other types of institutions that could be hurt by the provision.

"The [cohort default rate] was designed as an indicator of institutional quality and integrity," a CCA memo states. "This is a questionable policy metric because community colleges, proprietary schools and minority serving institutions all accept a much higher percentage of lower income students than do traditional schools, and many have a higher CDR as a result. The single best predictor of a student’s likelihood of default is the student’s own socioeconomic status."

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