The Default Trap

Career College Central Summary:

  • Advocates for community colleges are pressing federal lawmakers to make adjustments to a student loan law they say is a “blunt tool” that could unfairly penalize colleges where only a small portion of students default on their federal loans.
  • The U.S. Congress in 2008 expanded the window for tracking so-called “cohort default rates” to three years, up from two. As anticipated, that move resulted in higher institutional default rates.
  • Colleges face serious sanctions if they have a default rate of over 30 percent — meaning 30 percent of federal borrowers default within three years of entering repayment — for three consecutive years. The penalties will be imposed for the first time under the bulked-up measure after September, when the rates for 2011 are finalized. They include the potential collegewide loss of eligibility for all federal aid programs.
  • Congress tightened this rule with an eye on for-profit institutions, which tend to have the highest default rates. But community colleges have also been ensnared.
  • The sector’s overall default rate is up to 21 percent, according to the American Association of Community Colleges (AACC). And while only 19 percent of community college students take out federal loans, colleges can still face sanctions if they cross the 30 percent threshold. 
  • Officials with ACCT said 15 community colleges had default rates of over 30 percent for the first two years under the new law (see box at right). And a handful of those colleges are wrestling with a draft rate for 2011 that is also over 30 percent. The draft rates are not final and have not been released publicly.

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