Certain types of students, including those who are first-generation or low-income, are more likely than others to default on their education loans. But even colleges that serve a large share of at-risk students can help prevent too many of them from defaulting, according to a report released Tuesday by Education Sector, an independent think tank.
The report, "Lowering Student Loan Default Rates: What One Consortium of Historically Black Institutions Did to Succeed," examines the best practices of a group of colleges that reduced their loan-default rates while continuing to serve large numbers of disadvantaged students. It also analyzes the characteristics of different types of colleges and their student bodies that contribute to default rates.
The federal government assumes that colleges have a role in whether their former students default on their loans, which usually means failing to make a payment for 270 days. A college can lose its eligibility to participate in federal financial-aid programs if a measure called the "cohort default rate" is too high. A cohort consists of borrowers who were required to start paying back their federal loans in the same year, and the default rates for colleges are based on what percentage of them default by the end of a two-year period.
The rule has been a hot topic lately because the government will start calculating the rate using a three-year time period instead of two, which will put more colleges at risk of losing their aid eligibility. Colleges will be held to the new standard beginning in 2014. And, as more students borrow more money to pay for college, and job prospects for graduates remain weak, students’ ability to pay back their loans is a growing concern.
Colleges now risk losing their aid eligibility if their cohort default rate is 25 percent or greater for three years in a row, or 40 percent or greater in any one year. Under the new tracking period, colleges will be ineligible if the rate is 30 percent or more for three straight years.
The change in calculating cohort default rates has been met with opposition, particularly from the Career College Association, which represents for-profit institutions. The group’s president, Harris N. Miller, has said that cohort default rates are the result of students’ socioeconomic backgrounds, not colleges’ actions.
That argument seemed odd to Erin M. Dillon, a senior policy analyst with Education Sector and one of the authors of the report. Research on graduation rates shows that both student demographics and institutional characteristics play a role in student success, Ms. Dillon says, and she expected cohort default rates to follow a similar pattern. So she and her co-author, Robin V. Smiles, editor at Education Sector, looked into the matter.
A Model Effort
They came across an interesting case study: a group of six historically black colleges and universities in Texas that worked together to lower their cohort default rates. Historically black colleges used to be exempt from meeting the default rate cutoffs, but that changed with a 1998 law that gave them until 2004 to meet the bar. At the time, 14 such colleges in the country had default rates that would threaten their aid eligibility under the rule. Two of the colleges later lost accreditation, so the report examines what happened at the remaining 12. In particular, the authors focus on a group of six of the colleges, all in Texas, that formed a consortium and worked together to become compliant.
The consortium colleges made default prevention a priority, with top administrators supporting the efforts and one person appointed to oversee them. They worked with consultants, lenders, and guarantee agencies to improve their communication with former students. The colleges packaged their financial aid more strategically, limiting the amount of loans in students awards and counseling students who wanted to borrow more on the dangers of too much debt. They provided academic support to improve student retention, knowing that students who drop out are less able to repay loans. The colleges also provided financial advice to students through courses and awareness events.
All 12 of the historically black colleges brought their cohort default rates in line, but the six that worked together did so faster and more significantly, the report says. In the years since, cohort default rates have crept up at some of the consortium members. This suggests that the colleges poured extra resources into the effort when it was the main priority and that those extra measures made a difference, the report says.
Predictors of Default
The authors also looked at what characteristics influence a college’s cohort default rate. Other researchers have looked at what makes an individual student likely to default, but Ms. Dillon and Ms. Smiles took another approach. They started with a college’s default rate and looked at the student demographics and institutional qualities that corresponded with relatively high rates. The authors looked at the cohort default rates at 1,778 four-year colleges (public and private nonprofit) and 1,336 two-year colleges (public and for-profit).
They found that certain characteristics of the student population—like the percentage receiving Pell Grants, which go to low-income students—were significant predictors of cohort default rates at four-year and two-year colleges. But those demographics did not tell the whole story.
Higher graduation and retention rates predicted lower default rates at four-year colleges, while higher retention rates predicted lower default rates at public two-year institutions. Neither graduation nor retention rates were significant predictors at for-profit two-year colleges.
The authors also found that students’ debt level was a predictive factor at some types of institutions, but in a counterintuitive way. Higher average debt levels were associated with lower cohort default rates at four-year colleges, perhaps because prestigious colleges are expensive but leave their graduates able to repay debt. The same pattern held true at for-profit two-year colleges, possibly because the higher debt levels were concentrated at programs preparing students for well-paying careers. At the for-profit colleges, a larger percentage of students taking out loans predicted a higher cohort default rate.
The report also compares colleges’ predicted default rates—based on student demographics, selectivity, and status as historically black institutions, a proxy for share of first-generation students—to their actual cohort default rates. It focuses on four-year colleges, for which the authors were better able to explain the variation in default rates, and found that none of the colleges’ predicted cohort default rates hit even 20 percent, much less the 25 that could begin to get them into trouble.