A Simple Change And A Storm of Lobbying

A simple, seemingly technical, amendment to the Higher Education Act has set off a storm of lobbying from for-profit colleges. The lobbying push, which began earlier this year, is targeted toward an amendment that would change the way the Department of Education calculates student loan default rates. Currently, the federal student loan “cohort default rate” is the percentage of students who default on their student loans within two years of leaving school. The amendment would change this to the percentage of students defaulting within three years of leaving school. That one additional year has put many for-profit colleges and their collective representative, the Career College Association (CCA), on the offensive.

Why is the for-profit sector so concerned? Because changing the way the default rate is calculated puts them at risk of losing access to federal student loan money. Changing the calculation will cause the default rate for all colleges to go up, but it is especially bad news for for-profit colleges and could put hundreds of schools at risk of running afoul of the default rate cut-offs for participating in the federal student loan program. Currently, if an institution has a default rate above 25 percent for three years or a one-year default rate above 40 percent, the institution is no longer eligible to participate in the student loan program. And for-profit institutions are heavily reliant on federal loan funds.

The most recent National Post-Secondary Student Aid Survey report shows just how dependent for-profit colleges are on loan money. Seventy-two percent of students enrolled in for-profit institutions took out loans in 2003, compared with 53 percent at private, 4-year non-profit institutions and a mere 11 percent at public, 2-year institutions, the for-profit sector’s most direct competitors. And, students at for-profit colleges borrowed more money—an average annual loan amount of $5,800, slightly higher than the average annual amount for students enrolled in private, 4-year institutions ($5,100).

If for-profit colleges are going to continue to graduate students with heavy debt loads, they need to prove that the degrees are worth it—and default rates are one measure of the value of a degree. Sure, race, income, etc. are a big factor in a student’s likelihood to default, but institutional factors also play an important role. Of course, if you just listened to the CCA, you wouldn’t realize this—they argue that students’ failure to repay loans is not an indication of institutional quality. They even put out a research report to prove it.

In January, the CCA released a study, prepared by Indiana University, purporting to show that default rates “do not reflect on the quality or type of institution attended”. But this conclusion depends on what you characterize as a ‘student’ characteristic versus an ‘institution’ characteristic. If, as the report does, you characterize earning a degree as solely a ‘student’ characteristic, then the fact that this is a top predictor of loan default would simply reinforce the conclusion that default risk falls squarely on the shoulders of students.

But a student’s likelihood of graduating depends heavily on the academic support, financial aid package, and counseling the student receives from an institution. Given what we know about the ability of institutions to influence a student’s academic success and likelihood of graduating, the report actually supports the importance of institutions in lowering student loan default rates. The report concludes that, “…students’ academic trajectories throughout postsecondary education—credits attempted, credits completed, grades earned, transferring, enrolling continuously, time to degree/certificate, and failing credit hours—emerge as strong predictors of loan default. It is this constellation of student academic success variables that consistently represents the strongest set of predictors of loan default.”

But it is important to the for-profit sector that lawmakers don’t reach this conclusion. The amendment to change the default rate calculation has already been softened in response to lobbying efforts—the cut-off for participation in the student loan program will be raised to a 30 percent default rate over 3 years and schools will have until 2012 before the amendment takes effect. These changes will help for-profit institutions, which would see the greatest increase in default rates with the change. According to Department of Education calculations, for-profit colleges would, on average, see their default rates double with the addition of just one year, compared with a 50 to 75 percent increase in other sectors.

For-profit colleges often argue that their sector provides students that otherwise would not attend college—primarily minority, low-income students—with the opportunity to earn a degree. But this opportunity cannot end when a student enters the door and pays his bill, it must include the opportunity to receive needed academic supports and the opportunity to earn a degree. And it's not just for-profit colleges that need to pay attention to student academic success—many public institutions and private, non-profit colleges can do a lot more to support student learning and student success.

Student loan default rates are one measure of the extent to which institutions are providing a real opportunity—with high cut-offs for participating in the loan program, the default rate measure helps to protect students from colleges that simply provide them with the opportunity to pay a bill, rather than the opportunity to earn a valuable degree.