Last month, the Education Department released its annual report on federal student loans in default showing results that makes everything look A-OK!. This is the Three-Year Cohort Default Rate and on the face of it, the news is very good. The rate for students going into default on their federal loans in 2011 is 13.7 percent. That’s a drop from 14.7 percent for 2010. Any drop is good and a full percentage point might even be an indicator of an improving economy. Unfortunately, that is not the actual, total percentage of students who were unable to repay their loans in 2011.
The cohort rate in the report is an accounting tool that actually measures schools with former students that default at an exceptionally high percentage within two years after they have begun making loan payments. The criteria is over 30 percent of former students for a three year period or over 40 percent in one year. Schools that meet this criteria can be sanctioned by the Education Department. This means that access to federal student aid programs can be blocked for one or more years.
Skewed results from Income Based Payments
The cohort rate has also been advertised in the last few years as an indication of financial stress with the idea that payments are just too high and should be lowered. Like the one percent drop, this also isn’t entirely accurate. Federal student loan programs offer a wide variety of repayment options such as Income Based and Income Contingent options in order to avoid default. This prevents a total loss of revenue and students (and their co-signers) do not see their credit scores go down.
This does not mean that the Federal student loan program is in good shape though. Thanks to better instruction on their student loans from colleges and the Education Department, enrollment in these programs, as well as the new Pay-As-You-Earn option has increased from 10 to 12 percent this year. No one wants anybody to default on their loans, but even the Department’s own estimates are that about 25 percent of borrowers in some of these plans can fully meet the requirements of them and still never even pay off the principal of the loan, and qualify for student loan forgiveness.
More Skewed Results From Fuzzy Math
Unfortunately, recent actions taken by the Education Department are only going to obscure those numbers further, leading to skepticism by many. Until a few weeks ago, the cohort rate was applied against any student who defaulted on any loan, even if that student has multiple loans. Makes sense and is very fair. Now, it was decided to not include borrowers who defaulted on only one loan while keeping the others in good standing. This does nothing to reduce the numbers of students defaulting, but it will help colleges that were facing having their access to federal student aid blocked. In fact, these changes were applied to the latest numbers that have been used in this article. Despite that, twenty-one schools still did not clear the lowered bar and may face being cut-off from federal funding.
The whole point of the tougher rules in the 2008 reauthorization of the Higher Education Act was to put force schools to improve services to students and give them the chance to control how they did it; lower tuition, improved job placement services, no options were taken off the table. In the end, the Education Department has apparently decided to side with the colleges rather than with the students. It’s great that students have the various repayment options to avoid default. However, the number of students using these programs has grown and so far, the colleges themselves have not been held to any standards to bring down costs or improve what they offer. This is what has to be done to really lower student default rates and not just manipulate the numbers to keep federal aid flowing.