Manipulation of Student Loan Default Rates

A recent New York Times article brought attention to a GAO report about schools manipulating their cohort default rate data to avoid federal sanctions that can result from schools having too high a percentage of students default on their loans. Because cohort default rates are a metric I’ve encouraged prospective students to look at, I wanted to provide some additional detail.

As part of the federal financial aid program, schools are required to publish a cohort default rate (CDR), which is the percent of student borrowers who have defaulted on their loans within three years of graduation. Generally, a school loses eligibility for the federal direct loan program if its CDR exceeds 40% in one year or 30% in three consecutive years. The CDR only measures the first three years after graduation, so as long as a student doesn’t default or miss a payment in the first three years, the school is not accountable, no matter what happens in year 4 or beyond.

The GAO found that, while just over 10% of federal student debt was in default as of Sept., 2017, only 32 schools were subject to sanction for their CDRs in the 2014-2016 penalty years. The majority of schools facing sanctions are private, for-profit schools: 88% of the sanctioned schools fell under that category, with only 3% being private non-profit 4-year schools and the remainder being 2-year or less public schools.

These schools rely heavily on the federal direct loan programs to pay for tuition, which in turn generates the school’s revenue. As a result, many have turned to outside consultants to counsel graduates on loan repayment options. The GAO report found that many of these consultants encourage borrowers to enroll in forbearance programs rather than potentially more favorable income-based repayment plans. What’s the impact on borrowers? According to the GAO, “A typical borrower with
$30,000 in loans who spends the first 3 years of repayment in forbearance would
pay an additional $6,742 in interest, a 17 percent increase. GAO’s analysis of
Department of Education (Education) data found that 68 percent of borrowers
who began repaying their loans in 2013 had loans in forbearance for some
portion of the first 3 years, including 20 percent that had loans in forbearance for
18 months or more (see figure). Borrowers in long-term forbearance defaulted
more often in the fourth year of repayment, when schools are not accountable for
defaults, suggesting it may have delayed—not prevented—default.”

Recent college graduates should spend some portion of the grace period before their loans go into repayment familiarizing themselves with the different payment options. That way, borrowers can choose the best option for themselves, rather than the best one for their school.

And remember, all of this only applies to federal student loans.

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