Staggering Statistics on Student Loan Default Rates

July 13, 2010 by Joel Milani

The Chronicle of Higher Education recently obtained unpublished data on the state of student loan repayment—and it’s not good news.  In her article, Kelly Field compares the Department of Education’s cohort-default rate (the default rate per borrower during the first two years of repayment) with The Chronicle’s exclusive data that show default rates per loan over the course of 15 years. Click here to read the full article.

She argues that the two-year cohort-default rate is an inaccurate measure of the percentage of default rates per student, since colleges can easily push students into deferment or forbearance, thereby postponing the default until after the two-year period. The data presented by The Chronicle, she suggests, paints a much more accurate picture of student loan default rates.

Unsurprisingly, for-profit colleges produced the highest percentage of loans in default during the 15-year period. What wasn’t expected was how high the number actually was: after 15 years of repayment, 40% of loans taken out by students of two-year degree programs at for-profit colleges were in default.

The article cites several reasons for the disparity in the proportion of defaults by students of for-profits colleges, finding some, but not complete fault with the institutions themselves.

The article underscores points raised by the Senate hearing last month. Despite the invaluable services that for-profit colleges offer to adult, working and distance students, there are those institutions that intentionally exploit the federal financial aid system, and pass risk onto their own students—and to the U.S. taxpayers.

A few suggestions are made as to possible ways to curb the number of loans in default. Most involve implementing a system of categorization and rank of for-profit schools based on their effectiveness, then withholding federal aid from schools that don’t stack up. Mark Kantrowitz, who runs the financial aid website finaid.com, offered this suggestion:

[T]hat the department develop an independent measure of institutional quality that could yield an “objective ranking of for-profit colleges” and serve as a guide for prospective students. One possibility, he said, is a standardized test of achievement for graduates from each degree program, administered by one of the major test developers.

Whatever the solution eventually looks like, it should drastically alter the regulations that determine how and when for-profit colleges receive federal aid. This is necessary both for the protection of future students and taxpayers, and the validation of ethical for-profit colleges—not to mention avoiding smug ‘I told you so’s’ from an even wealthier Steve Eisman.

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Photo by santanartist via Flickr.