• August 28, 2015

New Measure of Student-Loan Defaults Could Threaten Hundreds of Colleges

More than 220 colleges have long-term student loan default rates so high that they would lose all federal student financial assistance under the terms of a new law that eventually will measure those rates over a three-year time scale, according to new Education Department figures.

That's more than six times the number exceeding the current limit, in which the department considers defaults over a two-year period and makes colleges ineligible for federal aid—a source of money that is critical to the survival of most institutions—if too many of their past students fail to pay back their loans on time.

The change from a two-year to a three-year measure doesn't take full effect until 2014. The Education Department calculated compliance rates under the three-year period and publicly released the numbers on Monday as a way of helping institutions prepare. (The figures are available from the department's data center; click on "Trial Three-Year Cohort Default Rates.")

Student-loan defaults are more common at for-profit colleges and other institutions that serve lower-income populations, and the move toward a stiffer default-rate measure has left many of those institutions warning of a growing harm to the students most in need.

"The only thing that explains default rate is the socioeconomic background" of the student, said Harris N. Miller, president of the Career College Association, which represents for-profit institutions. "By using that as the metric of quality, you will always be discriminating against low-income students."

An Education Department official disagreed, saying that nearly two decades of experience has shown that using loan-default rates as an institutional eligibility measure doesn't deprive poor students of college but merely spares them from attending bad colleges.

The default-rate requirement culled out hundreds of colleges a year when it first took effect in the early 1990s, said Daniel T. Madzelan, acting assistant secretary for postsecondary education, yet college enrollment nationwide is now at record levels. "Students evidently found alternatives," Mr. Madzelan said.

One of Several Measures

College students nationwide now collect about $24-billion a year in Pell Grants, the main federal support for low-income students, and borrow about $84-billion a year in government-subsidized loans. Such federally backed money can make up as much as 90 percent of the revenue at many colleges.

The rate at which a college's former students default on their federally subsidized loans—generally meaning they haven't made payments on the loans for more than 270 days—is one of several measures the federal government uses to help ensure taxpayer-supported student aid is being spent for legitimate educational purposes.

It's the students, rather than the taxpayers, however, who ultimately benefit from lower default rates, Mr. Madzelan said. That's because student loans generally cannot be dismissed even in bankruptcy, meaning the federal government eventually makes more money from students who default on their loans than it loses, he said.

Most students are required to begin paying back federally subsidized loans six months after they graduate or otherwise leave school. A college can lose eligibility for both grants and loans if its default rate exceeds 40 percent among its former students in the first year after they're due to begin repayment. Colleges also can lose eligibility if the rate of borrowers defaulting within two years of their scheduled start of repayment is 25 percent or greater for three consecutive years.

A new law, the Higher Education Opportunity Act (HR 4137), approved last year by Congress, will change that last measure, effective in 2012, to begin counting borrowers who default within three years of their scheduled repayment. Using that three-year window, colleges would be ineligible if their borrower default rate is 30 percent or greater for three consecutive years.

Among more than 5,000 colleges with students receiving federal financial assistance in the 2007 fiscal year, only 36 institutions with at least 30 students in repayment had default rates of 25 percent or greater on the two-year measure, according to the new Education Department data. But 221 colleges had default rates of 30 percent or greater on the three-year measure, the data showed.

No college with the minimum number of borrowers exceeded the 25-percent level for three consecutive years using the two-year measure, said Benjamin Miller, a policy analyst with Education Sector, an independent think tank. As many as 40 colleges, however, may have exceeded the 30-percent level for three years using the three-year measure, Mr. Miller said.

Nationwide, the average rate of default on a federally subsidized student loan was 6.7 percent in 2007, the Education Department announced in September. The new data being released on Monday, however, shows the average default rate for fiscal 2007, when calculated on the three-year measure, was 11.8 percent, Mr. Miller said.

Congress adopted the three-year window after some lawmakers argued that many institutions and their partner lenders, whose eligibility for the federal program is also tied to default rates, were avoiding declaring a borrower in default until just after the two-year measuring period had passed.

Counseling Tied to Mandate

Colleges don't necessarily deny the tactic. Some of them, along with partner banks that provide federally subsidized student loans, might now respond to the new law by simply extending their efforts to delay defaults by one additional year.

The ATI Career Training Center, which prepares workers in fields that include health care, personal fitness, automotive repair, and welding, saw the student-loan default rate at its 1,355-student Dallas location rise from 27 percent under the two-year measure to nearly 50 percent under the three-year window, according to the Education Department data.

Arthur E. Benjamin, chief executive of the for-profit institution, said that jump largely reflects the fact that the center in Dallas stopped providing its former students with loan-counseling assistance after the two-year period.

"As a result," Mr. Benjamin said, "the three-year rate released is not reflective of what the rate would be had the institution continued to provide counseling and assistance to its students for the full three-year period." In the future, he said, ATI will extend that counseling by another year and thereby "substantially" reduce its default rate for the new three-year measuring period.

Still, it's not a fair gauge, said Mr. Benjamin, who serves on the Board of Directors of the Career College Association. Congress should at least consider local economic conditions when basing education policy on default rates, he said. The government otherwise might "depress a region's potential for future economic development," he said.

Central State University, a public four-year institution in southwestern Ohio, has similar concerns. Central State, with about 2,000 students, saw its default rate grow from 22 percent under the two-year measure to 33 percent under the three-year window, according to the Education Department data.

The university has many graduates, including grade-school teachers, whose jobs simply don't pay enough to cover the cost of attending college, said Phyllis Jeffers-Coly, dean of enrollment services. Sanctioning universities based on default rates, she said, is "not dealing with the fundamental question of, How are we going to make college affordable?"

Obama's Graduation Goal

That problem should be especially evident to President Obama, said Harris Miller of the Career College Association, given the administration's stated goal of having the world's highest proportion of college graduates by 2020. The government does need to guard against putting those students in substandard colleges, he said, but it could do that by developing better systems for measuring student success and job placement. The default rate, he said, is a less direct and less accurate measure.

The government does use other methods to deter substandard institutions, including regular reviews by accreditors of curricula and facilities. And the fact that only a handful of colleges now get disqualified each year because of excessive loan-default rates may suggest that particular measure isn't too strict, Mr. Madzelan said.

For some institutions, though, the threat is worrying. The practical-nursing program run by the Board of Cooperative Educational Services in the New York counties of Madison and Oneida saw its default rate surge from 16 percent under the two-year measure to 43 percent under the three-year window, according to the Education Department data.

The publicly operated program, with about 160 students paying $7,800 for an 11-month course, is the only school in the two counties producing licensed practical nurses, said Richard W. Mitchell, the board's director of health occupations. Many of the school's students have been single mothers forced to drop out because of family crises, such as the loss of a child-care provider, Mr. Mitchell said.

The school, however, works out whatever financial arrangements it can manage to help keep its students in class, and it doesn't pursue collections against any of them, he said. "Our philosophy," Mr. Mitchell said, "is that everyone deserves a chance."


1. cbr79 - December 14, 2009 at 09:29 am

Student groups and critics of FFELP have long criticized lenders for allegedly making more money on defaulted loans than repaid loans.

Little did we know that all along "the federal government eventually makes more money from students who default on their loans than it loses," the Department's Dan Madzelan said.

So even after FFELP goes away, as it might, the concerns of FFELP critics will not have been satisfied. What will be there solution then... loan forgiveness for all?

2. realeducator09 - December 14, 2009 at 10:06 am

The US Department of Education should fund, free of charge, the first two years of college at an in-state college for all students who gain admission, with completion stipulations, including pay back for unfinished courses or programs. Our government seems to be able to find money to pay for everything but the things that really count.....Iraqi War, Blackwater....Haliburton....need I say more.

3. johnburningham - December 14, 2009 at 10:17 am

A student's major and GPA needs to be considered in approving the loans; some majors and low performing students have less chance of future income levels necessary for repayment.

4. atana09 - December 14, 2009 at 10:42 am

Part of the problem is that many of the policies about student loans were set under lobbying pressure by the FFELP corporations. So the situation in which that defaulted loans had become massively profitable to corporate lenders, was extended to government loans. Of course this situation is profitable, because unlike other forms of lending-there is literally no way for troubled borrowers to make accomodation. These troubled borrowers are fodder for a rigged system.

And that removal of consumer rights will be bring another issue unique to the dysfunctional nature of American higher education funding. Because of the enhancements popped onto defaulted loans, or the long term effect of a now economically ruined middle class there will be people who will not be able to pay educational loans prior to retirement. What then, will our system hound the elderly and poor into the grave for their mistake of obtaining a failed education?

About the increase in default rates, the three year assessment is more accurate because it takes into consideration (at least partially) more than the immediate post school years. The earlier two year assessment was placed under lobby pressure by the educational lenders, they wanted a short term assessment to disguise how bad the situation actually had become. If the government wanted a more accurate assessment they'd use 5-10 years, and would likely find the average default rate would be well into 20%+.

And its interesting that socioeconomic background is being noted as a primary condition to default rates. But what is not being stated is that also indicates how damaging our loan based system is to the working class and poor. In general although the training they obtain costs less, the end income for their careers is also considerably less than the people who attend higher echelon schools. So although their debt load is less than say a MD, for the working class if their education doesn't work they end up in a mire from which they cannot escape. So much for education still being a means to elevate the poor and working classes our current system has turned it into little more than a subtle form of sharecropping. John Ruskin, Senator Pell, and others who held out the hope of education being the great elevation are screaming in their graves.

About loan forgiveness, that may be a economic necessity and potential salvation from our current economic collapse and the generational economic decline of the middle and working classes. As the depression continues more people may not be able to pay these educational debts, the only debt for which there is no way out. And because of that, the better part of this lost generation will never be able to buy cars, houses or consumer goods. Eventually our government will have to decide which is more valuable, the lenders paradise or the benefit the educated and trained could provide to the general economy if they were freed from this toxic burden. And debt forgiveness or at least remediation could be done. With what was sent to the financial sector for TARP/TARF and its unholy children this nation could have cleared off every troubled mortgage and student loan in the country, and still had money to spare.

5. allens - December 14, 2009 at 11:55 am

I had thought that there were some professions - including teaching - for which there was some forgiveness for federal student loans (or at least an extension on when repayment was required)? This appears to contradict the material regarding "Central State University" above, for instance. Student socioeconomic background should also be taken into account.

6. atana09 - December 14, 2009 at 12:33 pm

Actually it is only public school teaching. Those who teach at CC's, tribal colleges,Universities, or private schools generally receive no loan forgiveness. Especially when the private/corporate loans are involved. Extension is not a especially pragmatic solution as the norm is to capitalize the interest. A few extensions or forbearance and its not uncommon for the principle amount to increase by a quarter or more.

And even with the small amount loan forgiveness involved; the debt issue has become a major problem for the primary and secondary education field. Last year the NEA published the article "My Debt, My Life" which clearly demonstrated how bad the edudebt system is for public educators. Essentially it is becoming a fools game to be a public school teacher given the cost of a bachelors and teaching certification versus debt and teaching income. Especially in rural and under served districts.

The same problem is beginning to adversely affect academe. Most new profs live in a manner befitting a peasant. Looking at the oil leaking relics most new profs limp onto campus is evidence. And gods help the adjuncts because no one else will. Increasingly due to the debt issue choosing a career teaching in academe is also becoming a poor decision.

So in addition to the defaults, and the fact we have an entire generations education becoming a liability. The end result of our current loan based system will be a major reduction in the quality and quantity of those who elect to teach.

Socio-economic background is a concern. However as Dr. Warren has noted the middle class has been mired in a loss of status which has developed over a generation. So what has happened to the working class regarding educational debt and default, is not long coming for the middle class.

In these regards the American debt for education scheme is one of the most socially destructive machinations ever devised. And the irony is that it is sold as a social elevation.

7. arrive2_net - December 14, 2009 at 07:53 pm

A system that allows the schools and lenders to avoid acknowledging defaults for months of a year is bound to have trouble.

8. atana09 - December 14, 2009 at 08:23 pm

Well the whole system has been troubled. A few years ago various academic investigative reporters found that loans in deferment and which re-entered payment had been reported by lenders as remediated defaults. Which made a good boon for them as they got the federal money for bringing loans out of default, but unjustly trashed the credit ratings of thousands.

And the two year reporting was largely invented as an avoidance of the true default rates.

So some of these schools are indeed unethical, but it's much easier to be so operating in a system which is quite morally bankrupt. The trouble is that, it will extend well beyond its adverse effect on academe. We have in our educational funding structure, a systemic bubble which cannot last much longer.

9. paradoxer - December 14, 2009 at 10:00 pm

There is now Income Based Repayment (IBR) which will allow those with federal loan debt greater than their income to pay no more than 15% of their AGI. If this were to exist for 25 years at that point they would have loan forgiveness. Thus if you have no income you would have no payment and still not be in default if you do the necessary paperwork to document your situation. IBR applies to any profession and essentially reopens the door for people to pursue areas of passion and not just a paycheck.

10. loweredexpectations - December 17, 2009 at 11:59 am

Thanks, atana. I agree with all you've said--and others, as well. I'd strongly discourage my child from earning a Ph.D. with the intention of becoming an educator, unless the system changes profoundly.

Sadly, by touting "higher education as the way out of poverty," we've created some troubling dilemmas. I teach students majoring in Human Services. They are borrowing too much money to repay on the salaries they'll earn--yet, if they don't get a degree, they won't get a job at all that pays above poverty wages. Many of our students are adults already working in the field. They need to earn a degree they can't afford to keep the jobs they already have that don't pay their existing bills--how will they pay several hundred dollars in student loan debt, too?

I think that the situation with edudebt is also contributing to grade inflation and higher ed's version of "social promotion." If the student fails to make satisfactory academic progress, and can't keep milking the financial aid "cow," then he/she will have to drop out and pay back loans for a degree not obtained. The student will actually be in WORSE shape than if he/she had not purused an education to begin with. Hideous.

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