Starting this fall, colleges will be held to a higher standard for keeping their student-loan borrowers out of default, and that has some student-aid administrators very nervous. Colleges that fall short could lose their eligibility to award federal student aid, the lifeblood of most colleges.
That looming threat made managing default rates a hot topic at a gathering of financial-aid administrators here this week, with many of them sharing ways to limit student debt and rein in defaults.
Community colleges are particularly desperate to bring down their default rates. Over the past six years, the percentage of community-college borrowers who defaulted on their student loans within three years of entering repayment has risen from 13 percent to nearly 21 percent. If the sector doesn’t improve its rates this year, some of its colleges will be kicked out of the federal aid programs.
Under the new standard, colleges will be accountable for their three-year default rates, rather than the two-year standard used now. Penalties will take effect if a college’s cohort default rate exceeds 30 percent for three years in a row, or 40 percent in a single year. As many as two to three dozen colleges are at risk of losing their eligibility this fall, according to Jeff Baker, head of the Education Department’s Office of Federal Student Aid.
Default rates have been rising for years, partly because more borrowers have struggled to make loan payments in a down economy. Last year the percentage of borrowers who defaulted within two years of entering repayment reached 10 percent—the highest rate in nearly two decades—while the percentage defaulting within three reached almost 15 percent.
But defaults are more of a concern for some sectors than others, since they are correlated with the demographics of a college’s student body and its graduation rate. Both of those factors contribute to higher default rates at community colleges as well as for-profit institutions.
With the Education Department set to release its latest default-rate figures in September, colleges’ aid administrators need to make sure their presidents and boards know how serious a problem having a high cohort default rate can be, Michael J. Bennett, associate vice president for financial-assistance services at St. Petersburg College, said during a presentation at this week’s meeting, the annual conference of the National Association of Student Financial Aid Administrators.
Mr. Bennett shared a slide he said could help audience members make that case. It spelled out the penalties for high cohort default rates and was illustrated with sacks of money representing Pell Grants and student loans with big X’s over them.
Colleges are not the only ones with something to lose. Borrowers who default can have their credit ruined, their wages garnished, and collection costs added to their balance. For them, said Mark Kantrowitz, senior vice president and publisher at Edvisors, “defaulting on a loan is like a trip through hell.”
A Looming Threat
Colleges have known for years that the switch to a three-year default rate was coming. That has “inspired a lot of fear,” Debbie Cochrane, research director at the Institute for College Access and Success, or Ticas, said in an interview.
Mr. Baker, of the department’s Office of Federal Student Aid, said he had been warning aid administrators of the coming shift for five years, but many officials were too busy to take heed.
“I don’t want to sound like an ‘I told you so’ person,” he said at a town hall-style forum on Sunday, “but 2014 is here.”
Mr. Baker said department officials have had “more than a few meetings” with Congressional staff members since the latest draft rates were released to colleges, in February, but he insisted there was little the department could do to help institutions that are in trouble.
“They ask, ‘What can we do about this?’” he said. “I tell them the statute is the statute, then kind of stare at them.”
Some colleges are still in denial. At a conference session on cohort-default-rate appeals, a financial-aid administrator from a rural institution that could exceed the cutoffs for a third year in 2014 asked the panelists if the department really intended to withdraw aid from failing community colleges.
“I don’t want to be Chicken Little if there’s some safety net out there,” said Colleen Seltz, director of financial aid at Somerset Community College, in Kentucky. “Some of my colleagues say it isn’t going to happen,” she added hopefully.
Jean Rash, director of financial aid at Rutgers University, reminded her that “there is no sector-based safety net.”
“So the sky is falling,” Ms. Seltz concluded.
With millions of dollars in Pell Grants at stake, two-year colleges that are at risk “face one of two choices,” said Justin Draeger, president of the financial-aid administrators’ association, known as Nasfaa. “Double down on default management, or pull out of the student-loan programs.” Later this month Nasfaa and the American Association of Community Colleges will host a webinar profiling two colleges that chose opposite paths.
David S. Baime, senior vice president for government relations and research at the community-college association, doubts that many colleges will ultimately flee the federal student-loan programs “for the simple reason that loans are becoming an essential financing source for our students.” Roughly 17 percent of all community-college students take out federal loans, and just under a third of their full-time students do, he wrote in an email.
Besides, even if a college pulled out of the federal loan programs, it would still be on the hook for existing borrowers as they entered repayment.
On the Ground
For now, colleges are doing what they can to keep default rates in check. A growing number are turning to third-party vendors for default-management and financial-literacy services (see a related article).
But improving financial literacy might not be the right approach, said Ms. Cochrane of Ticas. “Financial literacy generally may be important for students,” she said, “but it’s not clear it helps students repay their loans.”
National Park Community College, in Arkansas, has become an example of how to tackle a too-high default rate, Lisa R. Hopper, the college’s director of financial aid, said in an interview.
The first year the Education Department released official three-year cohort default rates, National Park’s was 31.8 percent. If just six fewer borrowers in the cohort had defaulted, Ms. Hopper said, the college would have skated under the 30-percent threshold.
Lowering the rate for the next two cohorts became a campuswide priority, Ms. Hopper said. With 80 percent of the college’s students receiving federal financial aid, it was “a matter of keeping our doors open.”
National Park created a campuswide default-management team. Faculty members were asked to withdraw current students who didn’t show up to classes. The college collected borrowers’ contact information and shared it with loan servicers. And it hired a vendor to counsel borrowers who were delinquent.
As part of its federally approved default-management plan, the college required borrowers to take a loan seminar emphasizing that students don’t have to borrow the entire available amount. That step, among other things, contributed to a drop in the college’s loan volume, Ms. Hopper said.
For the next cohort, National Park’s cohort default rate was 30.7 percent. But the college should be all right: Its draft rate for the third year is 23.8 percent.
Other aid administrators say they’re confused about what they can and can’t do to bring down their default rates. At the town-hall session on Sunday, one administrator stood up to say she’d gotten conflicting information from Education Department officials about whether her college could require students to request specific loan amounts.
Mr. Baker responded that it was fine, as long as the college didn’t require students to justify their requests. He told attendees that the department planned to soon issue a “Dear Colleague” letter advising institutions what they could do to encourage responsible borrowing and to control their default rates. The letter, he added, would “strongly encourage” colleges to offer additional counseling to borrowers but remind the colleges that they couldn’t require students to complete it.
Meanwhile, lobbyists for community colleges are pushing for policy changes that could help institutions with dangerously high default rates. They want Congress to limit borrowing at the associate-degree level to half the maximum for bachelor’s programs, with even lower caps for part-time students. They’d also like policy makers to decouple Pell Grant eligibility from student-loan eligibility, so a high default rate wouldn’t jeopardize a college’s grant aid. And they want an increase in the “participation-rate index,” which shields colleges with low borrowing rates from being penalized by the department.
Mr. Baime, the community-college association’s lobbyist, acknowledges that raising the PRI, as the index is known, will be a tough sell. “After a certain point, it is hard to argue that you should get a break because only a given percentage of your students borrow,” he wrote in an email.
But some of the ideas are gaining traction. U.S. Sen. Lamar Alexander of Tennessee, the top Republican on the Senate’s education committee, has introduced a bill that would tie the amount students can borrow to their enrollment status. Sen. Tom Harkin, an Iowa Democrat and the committee’s chairman, has a plan to create a “student default risk” index that would factor in the percentage of students borrowing on a campus.
A PR Nightmare
Part of the challenge for colleges is that default rates are what bureaucrats call a “lagging indicator.” By the time colleges learn that they have exceeded the three-year limits for a particular cohort, the next cohort will have graduated and a portion of the third cohort will have left as well. That makes it harder for colleges to make corrections before penalties kick in.
Once the default rates are published, colleges will have 45 days to challenge them. But the grounds for appeal are narrow and don’t allow for arguments based on economic conditions or other extenuating circumstances. Colleges can claim that the data are wrong; that their low borrowing rate exempts them from penalties; that a majority of their borrowers are economically disadvantaged; or that a servicer failed to meet its obligations.
But appeals can be time-consuming and costly, as Mohave Community College has discovered. Its employees spent 480 hours building their case that 37 students in the 2010 three-year cohort had improper servicing, and it had to pay two servicers for the data, said Jackie Leatherman, a spokeswoman for the Arizona college. It filed the appeal last winter but has yet to hear back from the department.
Even when institutions win an appeal, they may suffer reputational damage. Patricia Hurley, associate dean of student financial-aid services at Glendale Community College, in California, said that when a former employer exceeded the default-rate cutoffs in the 1980s, the local newspaper published an article with an image of a sinking ship and a headline warning that the college might close.
“It’s the public-relations aspects that scare boards,” she said in a conversation at the conference.
In the end, one of the best things colleges can do to curtail their default rates, in the long term, is to help more students finish their programs. “Completion is just paramount,” Matthew La Rocque, a research analyst with Ticas, said during a conference session. Colleges can’t control the characteristics borrowers already have when they arrive on the campus. But they can help more of them graduate.
