Default Rates Dip (Slightly)

WASHINGTON -- After increasing for years, the rate at which students default on their loans several years after leaving college has ticked down slightly across all sectors of higher education, the U.S. Department of Education announced Wednesday.

Nationwide, the share of borrowers defaulting on their loans within three years of when they were supposed to begin repaying them declined to 13.7 percent from 14.7 percent last year, according to the new federal data. This year’s rate represents more than 650,000 individuals who defaulted on their loans, which is an increase, in real numbers, from the more than 600,000 borrowers who defaulted in the cohort released last year.

This year's rate measures the number of borrowers who entered repayment between October 1, 2010 and September 30, 2011, and who defaulted on their federal loans before the end of last September. 

Community colleges and for-profit institutions continued to see the highest rates of default among the students who borrow at those institutions. More than one in five students who took out federal loans to pay for community college defaulted on their debt -- even though many community college students don’t take out loans in the first place. For-profit colleges had a 19.1 percent default rate, down from 21.8 percent last year.

Four-year public universities and private nonprofit institutions, meanwhile, had the lowest default rates -- 8.9 percent and 7.2 percent, respectively.

Consumer and student advocates have long pointed out that default rates understate the full extent to which borrowers are struggling to repay their student loans. The federal government considers a loan to be in default only after a borrower fails to pay for 360 days or more.

Some 2.6 million federal loan borrowers across the country are in default on their loans, according to the most recent federal data available. But another 2.87 million borrowers are behind on their loan payments.

Accountability for High Defaults

Twenty-one colleges, mostly small for-profit institutions with beauty and cosmetology programs, now face penalties for having default rates that are too high, the department said. Barring a successful appeal, those colleges will lose their ability to provide students with federal loans and grants.

That is the largest number of colleges facing penalties for high default rates since 1997. But even more institutions would have made the list this year, the first time colleges could be punished for high defaults under three-year rates, had the department not tweaked the default calculations for certain colleges at the 11th hour.

The department announced Tuesday that it was granting a reprieve for some colleges that were on the brink of losing aid because of their high default rates. For those institutions, the department removed from their default rate calculation any borrower who had defaulted on one loan but also had another non-defaulted loan. For borrowers with more than two loans, each non-defaulted loan "negated" a defaulted loan, a department official said in an email.

"We only removed the borrower if ALL of the defaulted loans were negated by one or more non-defaulted loans," the official said.

Justifying the changes to the calculation, a department official on Wednesday cited the "unprecedented" changes to the federal student loan program in recent years, which had led to some circumstances in which a single borrower has to make separate loan payments to multiple companies.

Some consumer advocates were disappointed with that decision, which they said amounted to "free passes" for colleges that violated the default standards set by Congress. On Wednesday, the main lobbying group for for-profit colleges also criticized the department's recalculation of some default rates.

Noah Black, vice president for public affairs at the Association of Private Sector Colleges and Universities, said in a statement that the adjustment is an admission by the department that there are "certain flaws in how information is collected and [default rates] calculated."

Black questioned why, if the department thinks the loan-servicing problem "is such an extraordinary situation," its officials would not be making the adjustment for all institutions, not just those on the brink of penalties.

Several higher education observers questioned whether the department has the statutory authority to alter how the default rates are calculated. In addition, they said the decision to apply those changes only to a small subset of institutions -- those closest to failure -- could be viewed as arbitrary from a legal standpoint.

Department officials said Wednesday that fewer than 20 colleges -- including public, private and for-profit institutions -- benefited from the tweaked default rate calculations. That group of institutions, which the department declined to quantify or name, otherwise would have faced a loss of federal student aid this year if it were not for the recalculation of its rates.

The department removed "fewer than 400 borrowers" from all of this year's calculations and retroactively deducted "roughly equivalent" numbers of borrowers from each of the rates published the previous two years, according to the official, whom the department insisted remain anonymous.

Such a small number -- out of the more than 4 million borrowers who were tracked for this year's rate -- suggests that colleges with few borrowers to begin with benefited the most from the change, since adding or subtracting just a handful of defaulted borrowers to those colleges' calculations would swing the rate above or below the 30-percent threshold.

The tweaks to the calculation of default rates did not affect the national default rates, which would have been 13.7 percent with or without the changes, the department official said.

Department officials said that the "split servicing" problem is temporary but they had not yet decided whether to grant colleges similar reprieves on default rates in the future.

"At this time, we have not decided if we will continue to provide this adjustment," a department official said in an email.

Relief for a Community College

Despite all the high-level talk in Washington about what the default rate calculations mean for holding colleges accountability, institutions on the brink of losing aid welcomed the last-minute reprieve.

Frank Phillips College is one of the community colleges that faced the most serious risk of losing access to federal aid. The community college, which is located in rural Texas, got the good news this week that its rates had been adjusted down due to the split-servicing issue.

The tweaks affected how just a handful of students were counted. But they made a big difference for the college. Jud Hicks, president of Frank Phillips, said roughly 10 to 14 students were taken out of the default equation for each of the three years. Given that the college had between 186 and 238 students in repayment over those years, the adjustment was enough to keep default rates below 30 percent each year.

Hicks said in a written statement that people at the college were relieved to be out of limbo. But Hicks was far from happy about the process, adding that during the last three years he had become "more distraught over the whole ordeal."

The possible loss of federal aid weighed heavily on students, faculty and administrators at the college, Hicks said in an interview. For example, the default rate problem came up during the hiring process for new instructors. "You had to disclose that this was an issue," he said. And explaining the complex dilemma wasn't easy.

Hicks and others had long pleaded their case about flaws with the rates and how they were calculated. He talked with the local members of the U.S. Congress and officials from the department about how all students at the college, as well as Frank Phillips's existence, were threatened because a small number of students had not repaid their loans.

The college had also raised concerns about split-servicing with the department. Yet the solution didn't emerge until this week.

Meanwhile Frank Phillips had long labored "under the dark cloud of possible sanction," Hicks said. "This didn't sneak up on anybody."