Defaults Nearly Double

WASHINGTON -- Scores more colleges could face federal restrictions on financial aid once the government starts holding them accountable for their three-year student loan cohort default rates, judging from the first look at three-year rates made public by the U.S. Education Department today. Taken together, the three-year rates are 93 percent higher than the standard two-year rates for for-profit colleges, 63 percent higher for public two-year institutions, and 70 percent higher for private four-year colleges.

The rates released today are informational only, as colleges will not be punished based on their three-year rates until 2014, when the government will have collected and published three consecutive years of data on three-year rates.

The release of the data are meant to serve as something of an early warning system for colleges and universities, such that those whose rates would put them at risk of federal penalties might begin to "change their thinking a little bit" about their students' loan burdens, said Dan Madzelan, acting assistant secretary for postsecondary education at the Education Department.

Cohort default rates represent the proportion of federal loan borrowers who began loan repayments in a given fiscal year and who defaulted on their loans within a defined period that follows (since 1989, that period has been two years).

For two decades, the government has used the rates as one high-profile indicator of whether institutions were providing a meaningful education, with the idea that colleges where students were regularly defaulting on their loans were failing to prepare them adequately for jobs that would allow them to pay off their student debt. Colleges and universities with default rates above certain levels risk losing access for their students not only to federally subsidized loans, but also to Pell Grants.

The cohort default rate has come in for criticism from two sides. Officials at for-profit colleges and some other institutions that serve large numbers of students from low-income backgrounds have argued that it is a skewed indicator of institutional quality, disproportionately punishing institutions that enroll more needy students. But consumer protection and student groups have argued that tracking borrowers over only a two-year window failed to account for many defaults, since the average borrower falls into default four years rather than two years after entering repayment, according to several studies.

The latter arguments proved persuasive to Congressional Democrats as they crafted the 2008 renewal of the Higher Education Act, which included a provision to extend to three years from two the period over which the government tracks borrowers' defaults.

Opponents of the change won numerous concessions from Congress aimed at softening the impact of the change. The government will not begin basing colleges' eligibility for loans and grants on the new three-year rates until 2014, when it has accumulated three full years of three-year rates. (The data published today present a three-year rate for the cohort of borrowers who entered repayment in 2006, and examines whether they defaulted by September 2009. It will take until 2014 for the Education Department to have accumulated three full years of three-year rates.)

In addition, the Higher Education Opportunity Act raised the level of the default rates that subject colleges to federal restrictions on financial aid. Beginning in 2014, colleges will face restrictions -- up to and including being barred from awarding loans -- if they have a three-year cohort default rate of 30 percent for three consecutive years, up from the current 25 percent. They will continue to face serious penalties, including being barred from awarding any kind of federal aid, for a default rate over 40 percent in any single year.

In making the rates public, Education Department officials sought to play down the imminent risk to colleges with rates at those levels. "It's important to remember that these rates are purely informational at this point," said Madzelan, the assistant secretary. "We're trying to be as forthright and clear and transparent as we can be, with the hope that schools will, as they have been, continue to work to minimize [their default rates].

"It's not quite, 'Move along, there's nothing to see here,' but there's no reason for places to panic at this point," he said.

Still, the data suggest that some colleges -- and some types of institutions -- have more to worry about than others. Analysis performed by Student Lending Analytics shows that for-profit colleges, which already have the highest default rates of any postsecondary sector, would see the sharpest rise in their cumulative rates using the three-year window, as seen in the table below:

Significantly greater proportions of for-profit colleges would find themselves falling into default levels that would put them at risk for Education Department sanctions, as seen in this table:

Proportion of Colleges With 3-Year Default Rates at Various Levels, by Sector

Below is a list of institutions with enrollments of more than 500 students and more than 100 borrowers entering repayment whose three-year default rates would -- if they were in effect for three consecutive years when Education Department sanctions kick in in 2014 -- put them at risk of restrictions on their federal financial aid. Numerous campuses of Corinthian Colleges' Everest College appear on the list. Numerous two-year colleges appear on the list, including several in Illinois, as do several historically black colleges, both public and private, including Central State University in Ohio, Allen University, and Rust College: