In Falling Default Rates, an Incomplete Picture of Borrower Distress

October 01, 2015

Default rates on federal student loans fell at all types of colleges this year, with the biggest drop occurring among for-profit institutions.

Nationwide, the federal default rate declined by almost two percentage points, to 11.8 percent for students who entered repayment in the 2012 fiscal year.

Only 15 colleges exceeded the cutoffs established by Congress and could lose access to federal student aid as a result.

The bit of good news masks a crucial fact, however: Thousands of borrowers are still struggling to repay their debt.

That reality was revealed by repayment data released by the Education Department last month as part of its new College Scorecard.

Among all colleges, 63 percent of borrowers who entered repayment in 2010 and 2011 had begun paying down their balance three years later, according to the department’s data. More than a third were either in default or making no progress toward repaying their principal.

Those numbers reinforce concerns that the annual default rate is providing an incomplete picture of borrowers who are having trouble repaying their federal loans.

After all, the default rates identify only a fraction of delinquent borrowers — those who have actually defaulted on their debt. They overlook the much larger shares of borrowers who are neither repaying their loans nor in default. The Institute for College Access and Success has dubbed those individuals the "missing middle," a group that includes borrowers who are delinquent or whose loans are in deferment or forbearance or in repayment plans in which the balance is growing rather than shrinking.

About a fifth of borrowers nationwide who entered repayment in 2010 and 2011 were members of that missing middle, an analysis by the institute shows. The share was higher at for-profit colleges, where the gap between defaulters and borrowers who weren’t repaying their loans was 30 percentage points, and smaller at four-year institutions, where it was 12.5 percentage points, according to the Education Department.

At 475 colleges, more than 40 percent of borrowers had not paid a single dollar toward their principal as of three years into repayment, according to a Chronicle analysis. Most of those institutions were for-profit colleges. At 171 of the 475 colleges, more than half of borrowers were not repaying their loans.

Despite the high rates of nonrepayment at those 171 colleges, only two lost their eligibility to receive federal student aid in 2014.

That’s because colleges are judged not on their repayment rates but only on their default rates. And the threshold for penalty is quite high — colleges become ineligible for federal aid when their default rate exceeds 30 percent for three years in a row or 40 percent in a single year. The median cohort default rate at those 171 colleges was 18 percent last year, far below the threshold to trigger penalties.

To be sure, the populations captured by default rates and repayment rates aren’t identical. Default rates include graduate students, for example, while repayment rates don’t. But the groups are similar enough that comparing them gives a fuller picture of borrower distress.

The gap between the metrics may also suggest cases in which institutions are "gaming" their default rates — pushing borrowers into deferment or forbearance to escape penalties.

Indeed, many colleges that were close to the 30-percent cutoff last year still had many students who were struggling to repay their loans, a Chronicle analysis found. At 245 institutions where 25 percent to 29.9 percent of borrowers had defaulted, the median repayment rate was just 44 percent. That shows that large proportions of borrowers attending those colleges were making no progress toward repaying their debt.

Colleges have been judged on their default rates since the 1980s, when Congress created the metric as a way to eliminate fraudulent trade schools. But the default rate’s days as an arbiter of institutional quality could be numbered. Sen. Lamar Alexander, the Tennessee Republican who is chairman of the Senate education committee, is considering using repayment rates in his plan to give colleges more "skin in the game" when it comes to student lending.

And this past summer, a bipartisan group of lawmakers introduced a bill that would replace the default-rate metric with a repayment rate. Colleges with repayment rates more than 10 percent below the national average over a three-year period would lose eligibility to participate in the federal student-aid system.

The bill would also establish a risk-sharing program under which colleges with low repayment rates would have to contribute to a fund to support colleges that do well at serving high percentages of low- and moderate-income students.

In a statement, the lawmakers sponsoring the bill said cohort default rates were "a poor standard for evaluating the quality of colleges."

The measure, said Sen. Jeanne Shaheen of New Hampshire, the Democratic co-sponsor, would "take long-overdue steps to weed out poorly performing institutions."

Sandhya Kambhampati contributed to this report.

Kelly Field is a senior reporter covering federal higher-education policy. Contact her at Or follow her on Twitter @kfieldCHE.

Correction (10/1/2015, 9:45 a.m.): This article initially misstated when repayment data became available as part of the new College Scorecard. It was last month, not last week.