Cohort Default Rates

In an effort to hold colleges accountable, the U.S. Department of Education measures how many borrowers from a college default on their loans – a “cohort default rate” which measures just the tip of the borrower-distress iceberg. In conjunction with its College Scorecard, the U.S. Department of Education has also begun releasing college repayment rates, which measure the share of borrowers paying down the principal balance on their federal loan debt.  

As the Department states in its College Scorecard documentation, default rates “can be manipulated through the use of allowable nonrepayment options like deferments and forbearances” which serve to temporarily keep default rates down and colleges in compliance with federal limits on defaults. Indeed, some for-profit colleges have admitted to doing just that.

While available default and repayment rates have some differences (most notably, default rates include graduate students and the repayment rates do not), they are comparable enough to identify trends and outliers. Comparing default rates and repayment rates tells you about how many students have avoided default but still aren’t paying down their loans: perhaps they’re delinquent, in forbearance or deferment, or in a repayment plan where their balance is growing rather than shrinking. And in schools where default rate manipulation is occurring, this group of borrowers – the missing middle group of those neither in default nor paying down their loans – will be atypically large. 

Across all schools, this missing middle group makes up about 22 percent of borrowers three years into repayment on average. But at 481 schools, 40 percent or more of borrowers are neither in default nor paying down principal. The vast majority of these schools (79%) is for-profit colleges, including Kaplan University which previously hired private investigators to track down former students to put them in forbearance. It includes CollegeAmerica, sued by the U.S. Department of Justice for violating rules on incentive compensation and by the Colorado Attorney General for fraud. It includes National College, which last month was ordered to pay $157,000 to the state of Kentucky for its years-long refusal to comply with a subpoena related to potential job placement rate falsification. It includes now-shuttered Westwood College, which had faced charges of deceptive marketing and recruiting for years and been sued by the Colorado and Illinois Attorneys General. Computer Systems Institute and Marinello Schools of Beauty, both of which were cut off of federal aid after this year having been found in violation of several federal rules, also made the list. This missing middle group also makes up more than half of all borrowers at some Everest College campuses that remain open for business. While Everest schools have new corporate management, the former CEO had this to say about managing cohort default rates during a 2011 investor call: “Forbearance, as you well know, is a pretty easy, just a question you have to agree to it and you’re on your way.”

​Forbearance abuse for the purpose of evading accountability is well documented in the for-profit college sector, but has not been documented at other types of institutions. The pie chart below shows the distribution of schools where 40 percent or more of borrowers are neither in default nor paying down their loans three years into repayment, and the list of schools is available here

 

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Beyond the fact that they’re almost all open-admission institutions, there are more differences than similarities between community colleges and for-profit colleges, including when it comes to student debt. New data released by the U.S. Department of Education in conjunction with the updated College Scorecard show just how different. Three comparisons are below.

  1. The vast majority of schools where debt problems are most severe are for-profit collegesInside Higher Ed’s recent analysis looked at schools where the majority of students borrows, and a minority of students is paying down their debt seven years into repayment. Our additional analysis found that, of the 257 schools that meet those criteria, 227 (88%) are for-profit colleges. Only two schools (fewer than 1%) are community colleges.
  1. Community college borrowers are much more likely to be paying down their debt. Three years after entering repayment, federal loan borrowers who attended community colleges were much more likely than for-profit college borrowers to have begun paying down their balance. Most strikingly, the available data on repayment rates by completion status show that borrowers who completed their studies at a for-profit college were about as likely to be paying down their loans as students who withdrew from a community college (53 and 51 percent, respectively). 
  1. Many more students at for-profit colleges are neither paying down their loans nor in default. While available default and repayment rates have some differences (most notably, default rates include graduate students and repayment rates do not), they are comparable enough to identify trends and outliers. Comparing default rates and repayment rates tells you how many students have avoided default but still aren’t faring well: perhaps they’re delinquent, in forbearance or deferment, or in a repayment plan where their balance is growing rather than shrinking. Some for-profit colleges have admitted to what the Department, in its documentation of the Scorecard data, described as “gaming behavior that may push students toward forbearance and deferments, meaning they stay out of default but don’t make progress on repaying their loans and may continue to accrue interest.”

    ​Across all schools, this missing middle group – those neither in default nor paying down their loans – composes on average about 21 percent of borrowers three years into repayment. But at 483 schools, 40 percent or more of borrowers are neither in default nor paying down principal. The vast majority of these schools (79%) is for-profit colleges, including Kaplan University and several Kaplan Colleges and Kaplan Career Institutes, which previously shared a parent company that hired private investigators to track down former students to put them in forbearance. It includes several campuses of Education Management Corporation-owned schools Argosy, Brown Mackie, and the Art Institutes. It includes Harris School of Business, Drake College of Business, and Westwood College. This missing middle group also makes up more than half of all borrowers at several Everest College campuses that remain open for business. While Everest schools are now under new corporate management, the former CEO had this to say about managing cohort default rates during a 2011 investor call: “Forbearance, as you well know, is a pretty easy, just a question you have to agree to it and you’re on your way [sic].”

    ​Forbearance abuse for the purpose of evading accountability is well documented in the for-profit college sector, but has not been documented at other types of institutions. Just 6% of the schools where 40 percent or more of borrowers are neither in default nor paying down their loans three years into repayment are community colleges. 

Any college with default and repayment problems of any scale should be focused on better enabling their students to repay their loans. But as the newly available data continue to underscore, for-profit colleges have by far the farthest to go.

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The final gainful employment rule released last week eliminated a key accountability measure for career education programs. As a result, many programs that would have failed the draft rule will now pass the final rule.  While some have argued that this change was made to benefit public institutions, it’s clear that for-profit colleges – and the University of Phoenix in particular – were the biggest winners.

The draft rule released in March measured career education program outcomes in two ways. First, the debt burdens of program graduates who received federal aid would be compared to their later earnings. Second, students’ ability to repay their loans – including both graduates and noncompleters – would be measured through a program-level cohort default rate, or pCDR. But the final rule uses only one measure: the debt to earnings ratio of program graduates, or DTE.

There are 682 programs that failed the draft rule’s pCDR test but pass the final rule (including those exempted because they have very few graduates). The vast majority of these programs - 89% - are at for-profit colleges, and for-profit college programs account for 97% of the now-passing programs’ defaulters. University of Phoenix programs alone account for 43% of the defaulters at programs that pass the final rule because the pCDR was eliminated.

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When too many borrowers default on their student loans, colleges can lose eligibility for federal aid. Colleges with a cohort default rate (CDR) above 40% lose eligibility to offer federal loans, and colleges with three consecutive CDRs at or above 30% lose eligibility to offer both loans and federal Pell Grants.

While some question the wisdom of tying colleges’ eligibility for federal grants to the outcomes of students who borrow federal loans, the link between Pell Grants and CDRs is incredibly important. That’s because federal taxpayers invest tens of billions of dollars in Pell Grants, and CDRs are the primary means of assessing whether colleges are a good investment for federal aid. Colleges can already avoid sanctions through challenges and appeals when relatively few of their students borrow.

To avoid losing access to Pell Grants, the most common form of financial aid for community college students, many schools are examining what they can do to help students avoid default. However, other colleges are citing fears of such sanctions for their decision to stop offering federal loans altogether - even schools that are at very low risk of sanctions. Cutting off access to federal student loans in this way is a problem because it forces students who can’t otherwise afford to stay in school to turn to much riskier types of borrowing, or to reduce their odds of completion by cutting back on classes, working long hours, or dropping out altogether.

Concerns about CDR sanctions have led some to argue that colleges’ eligibility for federal grants should not be tied to an outcome measure for federal loans, and that delinking grants from CDR sanctions might stop colleges from pulling out of the federal loan program. But if the goal is to ensure students are well served and have access to federal loans when they need them, then the logic behind arguments to delink Pell and CDR sanctions falls short on multiple fronts.

  • It wrongly presumes that default rates are entirely out of colleges’ control. In reality, colleges have a number of tools to prevent defaults and keep CDRs within acceptable levels. Given the severe consequences for each individual student who defaults, it’s imperative that colleges use every tool in their toolbox to keep borrowers on track. But as the New York Times recently editorialized, “[W]hat is likely to persuade colleges to deploy these tools in the first place is the threat of losing federal aid if they do not.” Indeed, the threat of losing eligibility for Pell Grants is focusing colleges on what more than can do to keep their students out of default.
  • With no incentive for colleges to keep students out of default, they will invest less in default prevention. This is not a statement about the character of student services professionals at community colleges, but rather about the obstacles they will face when trying to convince college leaders how scarce (and decreasing) resources should be spent. And when loan defaults increase as a result, the college will lose eligibility to offer loans.  So while colleges may be less likely to pull out of the loan program proactively if Pell and CDR sanctions are delinked, they will be more likely to be forced out of the loan program based on their default rate. The threat of losing federal loan eligibility is not going to be enough of an incentive for colleges to focus on keeping defaults down if they’re already considering opting out of the loan program. The end results? First, more community college students in default, and then far more without any access to federal student loans.

The upshot: delinking Pell and CDR sanctions will not help students.  Most community college students do not borrow federal loans. But students who do need to borrow should have access to federal loans, and it’s entirely appropriate to hold colleges deemed worthy of taxpayer investment by the federal government accountable.

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Last December, we wrote about three ways the U.S. Department of Education could and should be supporting colleges –low-borrowing colleges in particular – in offering federal loans. A recent letter from the Department addresses one of these requests head-on, and was particularly timely because it was sent just after colleges received their draft cohort default rates for borrowers entering repayment in 2011. The letter emphasizes the importance of student access to federal loans, and the participation rate index appeal for low-borrowing colleges:

Access to federal student financial aid, including low-cost Federal student loans, increases the likelihood that students will have the financial resources to successfully complete the postsecondary education needed to build a better future for themselves, their families, and their communities.

We encourage institutions to provide access to the full range of student financial aid options available that enable millions of students to enroll and succeed in college….

We believe that the availability of the Participation Rate Index Challenge and Participation Rate Index Appeal could mitigate some institutions’ consideration of withdrawing from the Direct Loan Program due to sanctions triggered by high cohort default rates.

This letter will help keep colleges in the federal loan program, but more is needed.  The Department should still publish borrowing rates alongside default rates and allow low-borrowing colleges to appeal their rates in any year, as we previously recommended.  And now that they have published this letter, they should promote it at conferences and meetings with colleges. Nonetheless, the Department’s recent action to help colleges understand the importance of federal loans and available appeals is an important step in the right direction.  As G.I. Joe famously says, “Knowing is half the battle,” and now colleges will be more likely to know.

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In the last three months, the U.S. Department of Education has struck out on clarifying what cohort default rates (CDRs) mean for students and colleges, prompting some colleges to stop offering federal student loans. The Department needs to provide better guidance to colleges on how to lower their CDRs while providing timely assurances to colleges with low borrowing rates so they do not needlessly pull out of the loan program, denying their students the safest way to borrow. A new proposal to use program-level CDRs only increases the urgent need for action by the Department.

Strike One: A Murky Scorecard

In September, the Department released new CDRs for the nation's colleges. But once again, it failed to provide the information necessary to interpret what the rates mean.

CDRs are the primary measure of college accountability. They measure the share of colleges’ federal student loan borrowers who default soon after entering repayment, an important measure of student outcomes. For colleges where most or all students borrow, CDRs can tell you a lot: high CDRs are a clear sign that students who attended that college are not faring well, and suggest that the college may not be a good investment for students or taxpayers. But for colleges where only a handful of students borrow, CDRs give fewer clues about how the colleges’ students are doing.

The problem is that the Department once again did not pair CDRs with colleges’ borrowing rates, as we have long asked them to do. That means that students from a particular college may appear very likely to default when, in fact, they are very unlikely to default because they are very unlikely to have to borrow at all. This is not helpful to students, journalists, or college leaders.

Strike Two: A Confusing Rulebook

Federal law acknowledges the importance of the borrowing rate in evaluating CDRs: colleges with high CDRs may lose eligibility for federal grants and loans, but colleges with few borrowers can avoid sanctions under what’s called a ‘participation rate index (PRI) appeal.’

Nonetheless, misunderstandings about CDRs and the PRI have sparked unnecessary fears in some colleges – particularly community colleges – that they will be sanctioned, leading some institutions to pull out of the federal loan program entirely. This is most obvious (but certainly not only true) in California, where borrowing rates at the vast majority of community colleges are in the single digits – well within the range eligible to appeal CDR sanctions.

Without access to federal loans, students who need to borrow to attend college must either drop out or turn to more expensive and riskier forms of debt, including private loans or credit cards. Yet community colleges in California continue to stop offering loans, citing fears of CDR sanctions as their rationale. We have long encouraged the Department to issue public guidance to colleges describing the appeals options available to them, and underscoring the importance of federal loan access for students, but to date it has not done so.

Strike Three: Silent Umpires

The type of sanction community colleges fear most is the loss of federal Pell Grants, which can occur after three consecutive CDRs at or above 30 percent. Colleges subject to this sanction lose Pell Grant eligibility immediately, but they can appeal the sanction if their borrowing rate in any one of the three consecutive cohorts is sufficiently low.

However, the Department will not confirm that the colleges’ borrowing rates are low enough to appeal sanctions until the college’s third consecutive high CDR, which is very late in the game. It is so late, in fact, that at that point there is no other way for the college to avoid sanctions, should its appeal be rejected, since it cannot influence default rates for years past. By year three, the college faces sanctions within mere months. With the stakes so high, it is no wonder that some colleges opt to stop offering loans long before a third consecutive high CDR. Simply put, colleges need to understand their risks and options on an annual basis so that they can work to reduce defaults and continue to offer federal loans.

The Department could easily inform colleges whether their CDRs will count towards sanctions, as we have recommended. Unfortunately, the Department has declined to do so, claiming that it would impose an “unmanageable workload” on its staff. However, the annual burden on the Department would be minimal, as few schools with borrowing rates low enough to qualify for the PRI have CDRs that would trigger sanctions in the first place. The Department also argued that colleges have sufficient time to avoid losing Pell Grant eligibility, since they can currently appeal when their third high CDR is in draft, rather than final, form. But this misses the point and ignores what we already know: without the right assurances from the Department earlier in the process, colleges will stop offering federal loans after their first or second year with high default rates.

The Next At Bat: Gainful Employment

While the Department has struck out when it comes to CDRs, it is still in the game, and the ongoing gainful employment discussions – which continue next week – underscore the need for them to act.

The Department’s latest gainful employment proposal would expand CDRs to measure program-level default rates (pCDRs) for career education programs, and cut off eligibility for programs where default rates are too high.  Existing protections – like the PRI appeal option – would carry over from CDRs to pCDRs, but that is little consolation for colleges given the current confusion and concern about PRI appeals. Most career education programs are located at community colleges, where borrowing rates are low and fears of sanctions are high. The Department needs to improve the PRI process to prevent more of these colleges from exiting the loan program – a trend that risks pushing more students to drop out or take out private loans, and reducing affordable career education program options instead of ensuring them.

- Debbie Cochrane and Matthew La Rocque

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For college students who need to borrow, at any type of school, federal student loans are the safest and most affordable choice. Unfortunately, some community colleges across the country continue to deny their students access to federal loans. This leaves students with options that range from bad to worse: they could stay enrolled and on track by using riskier and more expensive forms of debt, or they could work excessive hours, cut back on school, or drop out.

In just the past two weeks, media outlets have confirmed that three more colleges in two states have decided to stop offering federal loans. In North Carolina, Southeastern Community College became the latest of many in the state to do so in recent years. In California, a decision by the Yuba Community College District means that neither Yuba College nor Woodland Community College will offer loans for 2013-14. The rationale provided for decisions in both states is that the colleges’ default rates – the share of their federal loan borrowers who are unable to repay – may rise so high that the schools could be sanctioned by the U.S. Department of Education (the Department) as a result.

In all cases, high default rates mean that the college should do more to help their borrowers avoid default. But schools where only small shares of students borrow, including many community colleges, are afforded special protection against sanctions. This protection is based on colleges’ ‘participation rate index’ or PRI, a measure that combines colleges’ default rates with their borrowing rates. Unfortunately, too few community college administrators are aware of the protection or the relevant regulations – even those at the schools most likely to benefit.

Take the recent example of the Yuba District. With fewer than 5% of Yuba’s students taking out loans, the college would almost certainly qualify for this protection – called a “PRI appeal” -- should its default rate rise to levels that would otherwise trigger sanctions. Still, the Yuba Community College District Chancellor could either not find the PRI rules or understand how they applied to his district (excerpted from Sacramento Bee):

“Chancellor Douglas B. Houston said the district unsuccessfully combed U.S. Department of Education regulations in search of assurances that the district could successfully appeal. He said the risk was too great not to act.”

This is a shame. The Department – which encourages federal loan access – must do more to make sure that the right people see and understand these rules. We at TICAS have done what we can, responding to frequent questions from colleges and even creating a PRI worksheet (updated for FY 2010 three-year rates) so they can see how it would work for them. But colleges need to be reminded by the Department that providing access to federal loans is important, and that certain protections from default-rate sanctions are available. Colleges need to understand that while helping students avoid default should always be a priority, concerns about sanctions must be kept in perspective. And colleges need to know that the Department is committed to developing a PRI appeals process that works for schools – providing the assurances colleges need, when they need them – to alleviate the fears that lead colleges to stop offering loans unnecessarily. We hope the Department has taken note of the rash of schools abandoning the federal loan program and takes action before the next release of college default rates in September.

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The New York Times ran the editorial "Help Needed for Student Debtors" yesterday, reviewing the recently-released official two-year cohort default rates for fiscal year 2009. The rates show a sharp uptick in defaults, with 8.8 percent of student loan borrowers who entered repayment in 2009 defaulting by the end of 2010, up from 7 percent for those who entered repayment in 2008.

Following-up on an article that ran earlier in the week, the NYT Editorial Board also promotes the Income-Based Repayment program, that can help struggling borrowers remain in good standing, writing "the government needs to make sure that borrowers at risk of default have access to this program." Read the editorial and article

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