As Default Rates Drop, So Does Confidence in How the Education Dept. Counts Them

The official federal student-loan default rate fell a percentage point this year, with the largest dip occurring in the for-profit sector, data released on Wednesday by the U.S. Department of Education show.

But the talk among advocates, reporters, and policy wonks on Wednesday was less about the drop than about the Education Department’s last-minute tweak of its own numbers. That “adjustment,” which spared some colleges whose high rates would have cost them their ability to award federal aid, has reanimated the debate over default rates, long derided as a poor measure of institutional quality.

In news releases and on social media, many said the eleventh-hour reprieve undermined what little credibility the rates had, weakening them as an accountability measure. Policy analysts on Twitter were fierce in their critiques:

Others were outraged that the department’s fix would spare institutions but not students:

This is the first year that colleges are being penalized based on the share of students who default within three years, rather than two. Under the new standard, penalties kick in when a college’s cohort default rate—the share of borrowers who default on their loans in a given period—exceeds 30 percent for three years in a row or 40 percent in a single year.

Officials at community colleges and historically black colleges and universities feared that the new standard would result in far more institutions’ becoming ineligible to award aid. And this year, the number of institutions censured did go up, a little. In all, 21 institutions were called out for having rates above the cutoffs, up from eight last year.

But with one exception, all of those that failed this year’s default-rate test were for-profit institutions—mostly small beauty schools.

The only public institution that failed the test, Ventura Adult and Continuing Education, in California, had a borrowing rate of just 13 percent—a rate that will probably allow it to successfully appeal the sanctions.

An Education Department official declined to tell reporters on Wednesday how many colleges had been spared as a result of the adjustments, but said that it was fewer than the number that were sanctioned and that it included institutions in all sectors.

Inside the Numbers

The department’s last-minute adjustments in the calculations were also reflected in the national numbers released on Wednesday. Those changes resulted in the removal of roughly 400 borrowers from each of the past three cohorts but did not alter the overall percentages, the official said.

Nationally, 13.7 percent of borrowers who entered repayment on their loans in the 2011 fiscal year defaulted within three years, down from 14.7 a year earlier. Still, the total number of defaulters grew by roughly 50,000, and the default rate remained at or above 20 percent at open-access two-year institutions.

The overall decline appeared across all sectors, with public colleges dropping a scant 0.1 of a percentage point, to 12.9 percent, and private colleges dropping a full percentage point, to 7.2 percent.

But the most marked decrease was among for-profit institutions, where defaults decreased by 2.7 percentage points. For the first time, two-year proprietary colleges had a lower default rate than did community colleges, though the default rate for certificate programs at the for-profit institutions remained seven percentage points higher.

Noah Black, a spokesman for the Association of Private Sector Colleges and Universities, the main lobbying group for for-profit colleges, said the comparison reflects “our sector’s focus on graduate employment, financial literacy, and credentials in high-demand fields.”

Even so, the sector has the highest three-year default rate, at 19.1 percent, and accounts for 44 percent of all defaults.

Mr. Black questioned the Education Department’s decision to adjust the numbers only for institutions in danger of losing aid. Adjusting them for everyone, he argued, “would certainly result in a more accurate measure” of the three-year default rate.

In a news release issued on Wednesday, Secretary of Education Arne Duncan welcomed the decline in defaults, but he said that “the number of students who default on their federal student loans is still too high.”

“We remain committed to working with postsecondary institutions and borrowers to ensure that student debt is manageable,” he said.

Without taking direct credit for the drop, the department cited several steps the Obama administration had taken to help borrowers manage their loans, including broadening income-based repayment and expanding outreach to borrowers.

At issue, ultimately, is the question of what—and whom—the default rates are for. In theory, they are supposed to measure whether colleges receiving federal dollars are a good investment of student and taxpayer money. But critics say the numbers are easily manipulated by institutions and are unfair to colleges where relatively few students borrow.

Consumer advocates have said that such shortcomings underscore the need for additional accountability measures, such as the controversial “gainful employment” rule, due out this fall, which would judge programs based on their graduates’ ability to repay their debt.

“The department needs to act quickly to ensure that unscrupulous schools aren’t able to avoid accountability,” said Debbie Cochrane, research director at the Institute for College Access and Success, or Ticas. Both Ticas and community colleges say an adjusted number that multiplies the default rate by the institution’s borrowing rate would give prospective borrowers a truer estimate of their risk of default than the current rates do.