Get-Out-of-Jail-Free Card for Some Colleges with High Default Rates

This fall was supposed to be the year that colleges were finally at risk of losing access to federal student aid under tougher student loan default measures implemented in the 2008 reauthorization of the Higher Education Act. And sure enough, 21 appear to be--20 private for-profit institutions and one public.

But many more institutions may now be breathing a sigh of relief, thanks to data adjustments the U.S. Department of Education appears to have applied in special circumstances. Though the underlying calculation change is not completely unreasonable, everything else about it--from the timing of its announcement, its inconsistent application, the lack of transparency, and the decision to value colleges over students--raises a great deal of concerns.

Many more institutions may now be breathing a sigh of relief, thanks to data adjustments the U.S. Department of Education appears to have applied.

The Department’s move relates to an issue known as split-servicing. Essentially, borrowers may enter repayment owing multiple federal loans to different loan companies or servicers. Most commonly, this would arise with a borrower who first had loans through the bank-based system (FFEL) before it was eliminated in 2010, and then moved to the Direct Loan program, but it could also happen by virtue of taking out loans from different banks. While the Department’s ability to assign lenders to servicers means split-servicing should not be a problem going forward, the concern is that borrowers who have to make multiple monthly payments to different companies may lose track and default simply out of confusion.

Under the cohort default rate--the measure that judges colleges for the share of their borrowers who default within three fiscal years of entering repayment--the split-servicing issue did not matter. That is, if a student defaulted on any loan, he was counted as a default. End of story.

That is, until earlier this week. Yesterday, the Department of Education announced it was now going to treat any borrower who had loans with multiple servicers and defaulted on only one of them as if they had never defaulted. It would do this by removing them from the numerator of the calculation (the number of students who defaulted) while keeping them in the denominator (the total number of students who entered repayment). ((The total number of students in repayment includes students in deferment or forbearance.))

This is potentially a big benefit for colleges, which must ensure that fewer than 30 percent of their borrowers default each year or run the risk of losing access to federal student aid. Any reduction in the number of defaulted students will immediately lower an institution’s default rate.

If borrowers with multiple loans really were at higher risk of default simply due to confusion, then taking them out of the calculation is not the craziest the response. The problem is everything else.

First, the Department only made the change for schools that were at risk of losing federal student aid this year. To reiterate: The federal government agreed to give colleges in danger of failing a baseline accountability metric a get-out-of-jail-free card.

This selective application makes no sense. It creates rates throughout the data that are not comparable to the rest of the colleges. It also means that some schools may now have lower rates than others not at risk of sanctions simply because they didn’t benefit from the cherry-picked assistance.

The federal government agreed to give colleges in danger of failing a baseline accountability metric a get-out-of-jail-free card.

But the changes are completely opaque. There’s no indication of which institutions benefited, in which sectors, or by exactly how much. The Department says that about 400 students were removed each year for the last three years--but that could very well be enough to drop an institution just below the 30 percent threshold, into safe harbor.

Moreover, it’s unclear why this was necessary right now. Federal regulations already provide opportunities for colleges to appeal their default rates based on a variety of factors, including poor-quality servicing. Why not simply run this process before finalizing the rates, rather than oddly offering up this upfront assistance?

But what’s even more frustrating is the message such a move sends about prioritizing institutions over students. The institutions churning out borrowers who don’t repay their loans in such high numbers that the federal government takes notice are granted excuses from government regulations. There’s no indication, though, that the borrowers who have to deal with the consequences of a defaulted loan are getting any similar assistance in terms of making that loan automatically current or discharging any collection costs. If the default is not the colleges’ fault, why isn’t the student helped also? As our colleague Rachel Fishman Tweeted earlier today, maybe the ‘S’ in FSA should stand for servicers, not students.

Get-Out-of-Jail-Free Card for Some Colleges with High Default Rates
(New America)

As we said at the top, a number  of schools still didn’t make the cut. Twenty-one schools--20 for-profit institutions and one public, to be exact--will lose access to federal aid next year, assuming they don’t successfully appeal to have the data updated to a lower default rate. (See the full list below.) But the caveats to this year’s data beg the question: How many other institutions should have failed the test?

We’ll have more analysis of the default rate numbers in the coming days. In the meantime, you can find the data on the Department of Education’s website.

Authors:

Clare McCann was a policy analyst with the Education Policy program at New America.

Ben Miller was the higher education research director at New America, where he provided research and analysis on policies related to postsecondary education. 

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