Effecting Change on Default Rates

Study of how historically black colleges eased their student loan problems a decade ago has relevance for for-profit and other institutions facing a similar challenge now, its authors say.
February 23, 2010

Colleges, unlike leopards, can change their spots (or in this case their default rates), a study released today argues.

The report by Education Sector, "Lowering Student Loan Default Rates," is largely a historical look at how a consortium of historically black colleges and universities, faced with the prospect of federal penalties a decade ago, altered their policies and programs in ways that helped to lower their so-called cohort default rates and keep the colleges out of trouble.

The report's authors share the details of that story now not because it is interesting or compelling -- though it is -- but because they believe it sheds light on a timely problem facing other colleges as the federal government is again poised to change its approach to calculating student loan default rates.

Beginning in 2014, colleges will be judged based on the proportion of federal loan borrowers who begin loan repayments in a given fiscal year and who default on their loans within three years, up from the current two. Institutions with cohort default rates above a certain threshold risk losing their access to federal loan or grant funds, and the change in the formula is expected to put significantly more institutions at risk.

Among those most likely to be affected are for-profit colleges, which on average have the highest default rates now. Leaders in the career college sector have long objected that default rates are a seriously flawed indicator of the quality of institutions -- a point argued forcefully in 2008 research by Indiana University scholars and commissioned by the Career College Association; the research generally argued that individual student traits (income, etc.) mattered more than institutional factors, such as institutional type (public vs. private, for-profit vs. nonprofit, etc.), levels of students' borrowing, etc.

Those arguments, which the Career College Association put forward in 2008 to oppose a Congressional proposal at the time that would have toughened the government's law on default rates even more than the one ultimately adopted, caught the attention of Education Sector's Erin Dillon, one of the authors of the new report. She was struck, she said in an interview Monday, that the career college study seemed to "argue that it was not appropriate to hold institutions accountable" for their default rates, because the low rates were so directly attributable to the fact that the institutions disproportionately educated students from low-income backgrounds.

Education Sector explores those assumptions in two main ways. First, by recounting in detail the story of how 12 historically black colleges and universities in Texas and nearby states lowered their default rates from 1999 to 2002 to avoid losing their eligibility for financial aid, the authors hope to provide "powerful evidence that institutional practice can make a different in determining a school's default rate, even for schools that enroll high percentages of low-income and first-generation students," Dillon and her co-author, Robin V. Smiles, write.

The institutions in question, which included small private institutions such as Jarvis Christian College and Texas College and public ones such as Texas Southern University, worked closely with Texas Guaranteed, a student loan guarantor, to form the Texas Historically Black Colleges and Universities Default Management Consortium, through which they collaborated to create default management teams, changed their financial aid packaging strategies, and strengthened their efforts at retaining students, among other practices.

"The major takeaway from this is that institutional practices do matter," Smiles said. Added Dillon: "The big lesson for for-profit institutions is that these institutions were able to decrease their default rates [more] than other institutions that enroll very similar student populations. Instead of blaming your default rates on the students you enroll, there are actually steps you can take" to lower those rates.

The second part of the Education Sector analysis -- which meshes 2007 Education Department data on cohort default rates with data on students and institutions from the Integrated Postsecondary Education Data System -- was inspired directly by Indiana's review of existing research for the Career College Association, which was flawed, the authors say.

Most previous studies on defaults treated the question of whether a student graduated from an institution as solely a student trait, rather than as an institutional characteristic. "But research on graduation rates clearly illustrates that institutional practices and programs can moderate, and in some cases, overpower, the role of income, race, or other prior education in determining students' outcomes," the authors write. "By categorizing graduation as only a student characteristic, the existing research overstates the influence of student background on a student's likelihood to default."

The Education Sector analysis, like the previous studies, finds that student demographics "are a significant predictor of cohort default rates," the authors write. "But we did not find that they are the sole predictor ... or even the primary predictor."

Institutions with large proportions of Pell Grant recipients -- a leading indicator of having a low-income student body -- and heavy enrollments of underrepresented racial minorities tended to have higher default rates, the Education Sector researchers found. "Even after controlling for these student characteristics, though, an institution's ability to retain and eventually graduate its students emerged as an important factor in determining that institution's cohort default rate, regardless of the types of students it enrolls," the report found. "Both a higher retention rate and a higher graduation rate predicted lower default rates among four-year institutions, and higher retention rates predicted lower default rates among public two-year institutions. Surprisingly, though, neither retention rate nor graduation rate were significant predictors among for-profit colleges."

Response from the Career Colleges

Harris N. Miller, president of the Career College Association, said via e-mail Monday that officials of the group did not have time to review the Education Sector report's methodology to decide "whether we agree with the conclusions about how much default variance is explained by external factors (e.g., nature of student population, state of economy) as compared to factors over which an institution has more control." Miller's "initial reaction," he said "is that the analysis underplays the significance of the student risk factors of students who attend community colleges, minority serving institutions, and career colleges.

And the career college group agrees, Miller said, "that students, institutions, lenders and the government working together can assist students in preventing defaulting on loans. That is why CCA has had a Default Prevention Initiative in place for eight years that meets regularly with the [Education] Department to share best practices with other institutions and the Department that help address student default."

The extent to which institutions have control over their default rates, the Education Sector researchers argue, also makes it incumbent on them to sustain their focus on the problem. The consortium that helped the historically black colleges in Texas avert a crisis a decade ago "is less active and campus awareness of default prevention is less acute" today, the Education Sector report says, and "the rate has come back up at some schools."

With rates certain to rise for virtually all colleges when the default calculation shifts to three years from two, those institutions, and others, could once again be at risk unless they redouble their efforts.


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