Default Rate Amendment a Step in the Right Direction

Inside Higher Ed’s article on student loan “cohort default rates”—the percent of students not repaying their student loans as calculated by the Department of Education—is well worth reading for a good background on how we ended up with the current 2-year calculation. It also talks about the potential implications of a proposed amendment by Rep. Raul Grijalva to change the calculation to a 3-year default rate. Currently, the cohort default rate is calculated as the percent of students who default in the first two years of repayment—the proposed amendment would extend this to the first three years of repayment. Adding another year to the calculation could increase the default rate by as much as 62 percent, putting some schools at risk of losing their eligibility to participate in the student loan program.

Possibly the most interesting part of the article is the extensive comments section at the bottom, which shows the contentious nature not just of this amendment, but of student lending and defaults in general. A few selections:

As a colleague once observed back in the early 90s, institutions don’t default, borrowers do. The observation is still valid today.

There are definitely suspect people in every profession, but this pointing the finger business has got to stop. You can find many ways to calculate the default rate, but instead of wasting the time of the congress to manipulate these numbers, why don’t they take that time to fix the economy? Stop pointing fingers in the wrong direction. Instead, see what you can do to improve your immediate area.

If enacted, this will put financial aid offices on the defensive for matters they have little if any control over. The schools who this type of policy punishes are inevitably schools who admit a large number of students who have been poorly served by the K-12 system and from lower economic backgrounds (often the same group).

Low default rates are not evidence that elite universities are good schools, they’re evidence that their students have economic advantages to begin with. High default rates reflect the opposite.

The highly charged nature of this debate is even more reason to have more, and better, information on loan defaults. Yes, there are student risk factors that impact default rates, but as Education Sector’s recent policy brief showed, total debt levels also have a big impact, and institutions can go a long way to ameliorating that risk factor.

In the end, default rates are a symptom, though, not the problem. To truly address the problem of growing student debt, we need to figure out a way to keep college costs in line with inflation. Until that happens, all federal student debt policy will be just a stopgap solution.