Shape Up or Lose Out: The 218 Institutions that Must Develop Default Prevention Plans

On Friday, the U.S. Department of Education released the first official three-year cohort default rates for postsecondary institutions. As has been widely reported, more than 200 schools had rates at or above 30 percent and now must develop default prevention plans for submission to the Department. Which sectors are feeling the default prevention plan heat? At Higher Ed Watch, we thought we’d take a closer look.

But first, here’s some background on the development of cohort default rates. For nearly 20 years, the Education Department has kept track of the cohort default rates of every college that participates in the federal student-aid programs. The rates measure the percentage of students who have defaulted on their federal loans within two years of leaving college. The Department has used this measurement to sanction schools where large numbers of former students consistently fail to repay their debt.

In 2008, during the reauthorization of the Higher Education Act, Congress included a provision in the law to transition from requiring Title IV institutions to measure and report two-year federal student loan cohort default rate to a three-year rate.  Lawmakers recognized that the two-year window was too short to capture the extent of the problems students were having with paying back their federal loans.

Although the Department has been collecting trial three-year CDR data since 2008, this is the first year that there are consequences tied to not meeting certain thresholds. Those institutions that have a CDR at or over 30 percent—that is, 30 percent or more of borrowers who entered repayment between 10/1/2008 to 9/30/2009 defaulting on their federal student loans by 9/30/2011—must establish a default prevention task force to create the default prevention plan. These sanctions escalate toward loss of Title IV eligibility if the CDR is at or above 30 percent for three consecutive years. Starting in 2014, any institution with a CDR above 40 percent will automatically lose eligibility to participate in the Direct Loan program (but, interestingly enough, will remain eligible for Pell Grants).

With the publication of the official 2009 data, 218 institutions had CDR at or above 30 percent, and will have to develop default prevention plans. If the financial aid “death penalty” were in place today, 37 institutions would lose eligibility for having default rates in excess of 40 percent, of which 84 percent are for-profit institutions.

Our sister blog Ed Money Watch provides in-depth analysis looking at student demographics here, but below I’ve included an analysis that looks at the types of institutions who have CDRs greater than or equal to 30 percent.

Unsurprisingly, 73 percent of those with three-year default rates at or above 30 percent are for-profit institutions (Chart 1). It is Important to note, however, that less-than-two-year institutions (certificate-granting schools like beauty institutions) and two-year institutions account for 87 percent of the institutions with rates at or above 30 percent (Chart 2). Overall, for-profit, certificate-granting institutions are the biggest piece of the “at or above 30 percent CDR” pie (41 percent), followed by for-profit, two-year institutions (27 percent), and public, two-year institutions (13 percent) (Chart 3).

Of all the major publicly-traded for-profit higher education companies, Corinthian Colleges and Lincoln Education Services had by far the worst showing.  At Corinthian, 20 schools had CDRs of 30 percent or more, including 17 of its Everest campuses. Lincoln had 10 schools with rates of 30 percent or more, and one above 40 percent. Both Corinthian and Lincoln predominantly offer programs that last two years or less.

A zip file of the 218 institutions can be found here.

Visit the Federal Education Budget Project to access the new two-year and three-year CDR data along with historical rates.

Stephen Burd contributed to this post.