Under pressure from for-profit colleges, Democrats in the U.S. House of Representatives have agreed to modify a proposal in a key higher-education-policy bill that could have put hundreds of such institutions out of business.
The revised plan, which is included in a “manager’s amendment” to legislation to renew the Higher Education Act, the law that governs most federal student-aid programs, would allow colleges to have higher cohort default rates without losing their eligibility to award federal student aid. The House will take up the legislation on Thursday.
Democrats have also agreed to changes in the bill that would make it easier for for-profit colleges to comply with another eligibility rule that requires them to derive at least 10 percent of their revenue from nonfederal sources. Under the new language, colleges would be allowed to count institutional loans that they make to their students toward the 10-percent requirement.
The revisions come a week after representatives of more than 50 for-profit colleges descended on Capitol Hill to urge lawmakers to strike language from the bill that would change the way the U.S. Department of Education calculates the “cohort default rate,” the rate at which student borrowers who leave college in a given year default on their loans. That language would extend the time frame over which cohort default rates are calculated from two years to three years.
While lawmakers refused to revert to a two-year window, they made other changes in the bill’s language to protect some colleges with high default rates from penalties.
How default rates are calculated is significant because the department bases an institution’s eligibility for federal student aid, in part, on the proportion of its graduates who default on their loans. Institutions with default rates of less than 10 percent after the current two-year period are entitled to certain benefits that ease the administration of student aid, like the right to disburse loans for a semester in a single installment. Institutions with default rates greater than 25 percent for three consecutive years, or 40 percent for a single year, lose their eligibility to award federal student aid.
Switching from a two-year to a three-year time frame could have a particularly big impact on proprietary institutions, because more students might default over the longer period. If a three-year window had been applied to borrowers who graduated in 2004, for instance, the default rate at proprietary institutions would have nearly doubled, to 16.7 percent, according to an unofficial analysis by the Education Department. By comparison, the rate for public colleges would have increased from 4.7 percent to 7.2 percent, though the rate would have been higher at Hispanic-serving institutions and historically black colleges and universities.
In lobbying Congress to strike the provision, for-profit colleges complained that it would penalize them for accepting a large number of low-income students, who are statistically more likely to default on their loans. They argued that fewer low-income students would be able to attend college if for-profit institutions were put out of business.
While lawmakers decided to keep the three-year window, they agreed to raise the threshold above which colleges would be sanctioned, to 30 percent instead of 25 percent. They also agreed to allow colleges to apply for a waiver from the rules the first year that they exceeded the threshold, rather than having to wait until the third year to apply, as under current law.
Under the new language, a college whose default rate reached 30 percent or more for one year would be required to establish a “default-prevention task force” and submit a plan to the secretary of education describing steps it would take to reduce defaults. If the college reached the 30-percent threshold for a second year, it would be required to revise and resubmit the plan to the secretary, who could then demand that the college take certain actions to drive down defaults.
Harris N. Miller, president of the Career College Association, called the revisions “a major step forward.”
“We’re very pleased that they have realized that the original amendment would have a very negative effect not just on career colleges but many other minority-serving institutions,” he said.
But advocates for students said it was outrageous for colleges to argue that staying under a cap on default rates as high as 24.9 percent was an unobtainable goal for some institutions.
“They’re arguing that it’s reasonable for a quarter of the students they admit to default within three years?” said Luke Swarthout, a higher-education advocate for the U.S. Public Interest Research Group. “We’re providing neither access nor affordability if we accept a system with such incredibly high default rates.”
