A Faulty Argument

Back in December, I blogged about a proposed Higher Education Act provision that would change the way default rates are calculated by the Department of Education. I hypothesized that this change could increase default rates by about 60 percent, putting some schools at risk of losing their eligibility to participate in the federal loan program because of too-high default rates -- if a school has a default rate of 25 percent or higher over three years or a single-year default rate of 40 percent or higher, it loses eligibility to participate in the federal loan program.

The proposed change is pretty simple. Currently, the Department of Education calculates the student loan default rate as the percent of students defaulting on their student loans in the first two years after entering repayment. The proposed change would extend that window to the first three years after entering repayment. But, as we showed in an October Charts You Can Trust, the percentage of students defaulting on their loans grows considerably with each added year, particularly among students with high amounts of debt.

And now, as Inside Higher Ed reports, the Department of Education released numbers showing that for-profit colleges would see their default rate double on average, and other institutions could see their rates increase by between 50 and 75 percent (check out the article for numbers broken down by institution type). Not surprisingly, for-profit colleges are not happy about this change and are trying their best to resist it.

The Career College Association is quoted as saying, “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 [Cohort Default Rate] as a result. The single best predictor of a student’s likelihood of default is the student’s own socioeconomic status.”

Sure, socioeconomic status impacts a student’s risk of defaulting on loans and students should definitely be held responsible for responsibly managing their debt. But colleges have a responsibility to equip students with the skills and knowledge needed to get the jobs that allow them to repay their debt, and for ensuring students graduate on time -- or at all. And schools are also responsible for ethically counseling students on the amount of debt they can realistically undertake for their education and for providing adequate financial aid so that students are not graduating with overly burdensome debt loads. All of these actions are entirely within a college’s purview and would have a large impact on the percent of students defaulting on their loans.

Also, take a look at the Department of Education cut-off default rate numbers: 25 percent default rate over three years or a 40 percent default rate over one year. Is a college that consistently allows one in four of its students default on their loans in the first three years (in reality, two years*) after leaving college really providing a valuable service that the student and taxpayers should be paying for?

* Because it takes nearly a year after a student stops paying on his or her loan for the loan to technically be considered in default, a three-year window is really a two-year window, and a two-year window is really a one-year window. In addition, students with loans in deferment or forbearance are counted as being in repayment.