Fudging The Numbers

Technical Career Institute, a for-profit college in New York City, has found a new and creative way to keep its students from defaulting on federal student loans--paying off the debt. Inside Higher Ed reports today on an audit report released this week by the Department of Education's Office of Inspector General, which found that TCI paid hundreds of thousands of dollars to loan companies to keep their cohort default rates (the percent of students defaulting on federal student loans) below the cut-off for participating in the federal student loan program.

Unfortunately for the students, TCI wasn't being generous. The college paid off the students' federal loans, but then tried to collect the loan amounts and even reported the students to collection agencies when they didn't pay. Because the federal loans were technically repaid, TCI did not report these students as having defaulted, thereby keeping it's cohort default rate artificially low and ensuring it had continued access to federal loan and grant money--a big source of income for for-profit institutions.

Because the federal 'cohort default rate,' which determines eligibility to participate in the federal student aid programs, is based on the first two years after a student enters repayment on a loan, for-profit institutions have big incentives--millions of dollars in federal money--to keep students out of default for those first two years. TCI's actions are an extreme example, but other practices include encouraging students to enter forebearance or deferment on their loans until the two-year cut-off has passed, or employing default aversion companies to heavily track students for the first two years.

Default aversion is not necessarily a bad strategy, so long as it helps students avoid default over the life of their loan and not just those first two years. But data released by the Department of Education earlier this year, indicates that this isn't the case--for-profit institutions' default rates nearly double in the third year. This is a higher rate of increase than any other higher education sector, which see increases of 50 to 75 percent.

The current default rate calculation is a poor indication of students' ability to pay off student loan debt and can obviously be artificially lowered with some funny business practices. The Higher Education Act amendment to extend the cohort default rate calculation to three years is a step in the right direction and will make it a little harder for these institutions to fudge their numbers. But the Department of Education also needs to start publishing lifetime default rates for institutions. The purpose wouldn't be to sanction institutions for high lifetime default rates, but to give students an accurate picture of their risk of defaulting when they enroll--a picture that will be harder for institutions to distort.