Reprieve on Default Rates

As colleges face penalties under new, stricter loan default standards, Obama administration lets some colleges off the hook by recalculating the rates in their favor. 

September 24, 2014
 

WASHINGTON -- Colleges with large populations of low-income students have for months worried that their former students' high rates of default on student loans would eliminate their access to student aid under stricter federal standards that fully take effect this year.  

But the Obama administration, which is to officially announce the default rates for all colleges on Wednesday, is now giving some institutions a break.

The U.S. Department of Education said Tuesday that it would simply leave out some defaulted loans when calculating the default rate of the colleges facing a loss of federal student aid.

That “adjustment” to the default rate calculations, according to the announcement, helped an unspecified number of colleges avoid the penalties they would otherwise have faced this year for having default rates above the threshold set by Congress. Lawmakers changed the standard in 2008, but this is the first year that colleges face penalties for three-year default rates, as opposed to two-year rates.

Community colleges and some historically black colleges and universities had pressed the Education Department for relief from the new standard.

On Tuesday, Education Secretary Arne Duncan said he was pleased that no historically black colleges and universities would face penalties for their default rates this year. Fourteen historically black institutions had default rates above the 30-percent threshold last year.

Speaking to a conference of black college leaders, Duncan attributed the change to “the tremendous effort we made together.” However, he added, “some institutions remain troublingly close to the line.”

In calculating default rates, the Education Department typically looks at a cohort of loan borrowers at an institution, and then tallies how many of those borrowers defaulted on a loan three years after entering repayment. Colleges are allowed, on a case-by-case basis, to ask the department to remove some defaulted borrowers from the calculation for a range of reasons, including errors.  

To make the “adjustment” announced Tuesday, officials said they identified which colleges were on the verge of losing their student aid, and then removed from their cohort borrowers who defaulted on one loan but had not defaulted on another loan. The non-defaulted loan, they said, had to have been in repayment, deferment or forbearance for at least 60 days.

The adjustment was also applied retroactively to colleges’ three-year default rates for the past two years. Sanctions apply only to colleges when their default rate is 30 percent or higher for three consecutive years (or, if it surges to 40 percent in any single year). (An earlier version of this paragraph incorrectly stated the threshold for when colleges face sanctions for high default rates.)

In justifying the default rate calculation changes, which are unusual, the department’s announcement cited the fact that some borrowers have different slices of their federal student loan debt managed by different loan servicing companies, a problem known as “split servicing.” The problem arose several years ago when the Education Department began buying some -- but not all -- loans issued through the now-defunct federal bank-based lending program.

The department has not previously adjusted loan default rates in response to the “split servicing” problem, which it has said previously that it has resolved in some cases.

It is not clear from the department’s announcement whether it only removed defaulted loans affected by “split servicing” from the calculation or dropped a broader category of loans. Further, it was unclear whether the reprieve applied to any for-profit colleges, which typically have among the highest default rates.

A department spokeswoman declined to comment Tuesday on the changes the department made to the default rates.

‘Free Passes’

Critics of the department’s change said they were concerned that it means colleges are not going to be held accountable for the full scope of the defaults of their former students.

“It raises some serious concerns,” said Debbie Cochrane, a researcher at the Institute for College Access and Success, an advocacy group that has long tracked default rates. “The adjustments that the department announced means that schools are not being held accountable for defaults just because they’re presumed to have a split servicing." 

“If a school isn’t held accountable for a default, then the borrower shouldn’t be either,” she said.

It was also unclear Tuesday whether the department would exclude certain loans from the calculation of national default rates.

"We won't know how many free passes the colleges got," Cochrane said.

The department said that while officials won’t count certain default loans against a college’s default rate, that doesn’t otherwise change students’ obligations. Any defaulted loan removed from a college’s calculation still “remains in its current status for collection and other purposes,” the announcement said.

The expansion from two-year default rates to three-year default rates was designed by Congress to hold colleges more accountable for defaults. A House report in 2008 said the change was aimed, in part, at making it “more difficult for institutions to avoid defaults from being counted.”

Representative George Miller of California, the top Democrat on the House education committee, was one lawmaker who pushed for the expanded three-year default rates. He questioned the department’s adjustment to the loan rates on Tuesday.

"Any changes in the student loan system that reduce transparency and consistency may compromise our ability to hold poor-performing colleges accountable,” Miller said in a statement. “The department should be doing everything it can to ensure student borrowers who have defaulted have every opportunity for redress."

Boost for Two-Year Colleges

Advocates for community colleges, meanwhile, praised the department’s adjustment of the default rates. Community colleges are among the institutions that benefited from recalculated rates.

“We believe that the department has acted responsibly by not holding financially needy students hostage to the shortcomings of servicers and other parties involved in loan administration,” said David Baime, senior vice president for government relations and policy analysis at the American Association of Community Colleges.

Jee Hang Lee, vice president for public policy and external relations at the Association of Community College Trustees, said the department’s default data was messy.

“Clearly the department was unable to sanction any institution based upon the data,” he said.

Paul Fain contributed reporting to this story

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