Passing the Buck on Default Rates

In the coming weeks, the U.S. Department of Education will release the latest three-year cohort default rates for colleges participating in the federal student loan program. Some of the country’s largest chains of for-profit colleges are expected to fare even worse than they did last year.

Corinthian Colleges, for example, has told investors that it expects that “a majority” of its schools will have three-year default rates about 30 percent, a level that if repeated in future years could put these institutions in jeopardy of losing access to federal student aid. Last year, only about a quarter of Corinthian’s campuses had rates that reached that high.

But no matter how bad the results, there’s one thing you can be sure of — for-profit college leaders and lobbyists will refuse to take any responsibility for their former students’ repayment problems. Instead, they will continue to insist that the only factors that matter when it comes to their institutions’ high default rates and low student loan repayment rates (the proportion of borrowers who have paid down any principal on their federal loans in the last four years) are the characteristics of their students.

“The only thing that explains [a school’s] default rate is the socioeconomic background” of the students it serves, Harris Miller, the president of the then-Career College Association, told The Chronicle of Higher Education last year after the Education Department released the three-year rates for the first time.

Lanny Davis, the former Clinton lawyer who appears to relish his role as the chief attack dog for the for-profit higher education industry, echoed that comment in a column he wrote recently for the Huffington Post blasting the Obama administration’s proposed Gainful Employment rule.  “Repayment rates are a result of the demographic and socioeconomic status of the students who take out the loans, not the tax status of the colleges they attend,” he stated.

At Higher Ed Watch, we find this argument puzzling. While it is indisputable that socioeconomic and demographic factors have a significant influence on a student’s likelihood of defaulting, they are hardly the only factors at work. Otherwise, all colleges serving low-income and non-traditional students would fare equally poorly, but they don’t. It seems to us that Miller and Davis are actually selling the best-performing for-profit colleges short by discounting their efforts to transform the lives and prospects of their students.

Kevin Carey of Education Sector put it best in a column he wrote last year responding to Miller’s statement : “You’d think the notion that an organization that charges a lot of money for a given service has no impact on what happens to the consumers who receive that service would be taken as an accusation,” he wrote. “But for-profit colleges apparently see it as an excuse.” We couldn’t have said it better ourselves.

Ironically, a report that the group formerly known as the Career College Association released in April attacking the administration’s Gainful Employment plan confirms that other factors are in play. The study, which was conducted by the consulting firm Charles River Associates, found that even after controlling for demographic differences, for-profit college students are still significantly more likely to default on their loans than their peers at public and private, non-profit colleges. In fact, the firm concluded that student characteristics account for only about half the difference between the rates of for-profit institutions and public four-year colleges.

Meanwhile, Carey’s group Education Sector published its own report in February demonstrating the powerful influence that colleges have over their default rates. The report, written by Erin Dillon and Robin V. Smiles, tells the story of how a group of historically black colleges combined forces in the late 1990s to slash their default rates without sacrificing their commitment to serving low-income students. Among other things, they reduced the amount of debt they expected their students to take on; significantly strengthened the financial aid counseling and student support services they offered; and made a point of keeping in close touch with recent graduates so that they could provide them with loan counseling.

“The experience of the Texas HBCUs, along with a new statistical analysis of cohort default rates, suggests that dangerously high default rates for institutions that serve at-risk students are not inevitable,” the report states. “…Their [the Texas HBCUs’] success is not only applicable to other similar institutions, but to all schools that serve those students most at risk for default and who are committed to helping them succeed.”

In our opinion, the strongest evidence in this debate, however, comes from what may at first glance seem an unlikely source: the student loan giant Sallie Mae. For much of the last decade, Sallie Mae was the exclusive provider of both federal and private loans to students attending some of the largest for-profit school chains. The company’s experience with these schools tell a much different story than the one for-profit college lobbyists have been selling.

That’s a story we will return to shortly. Stay tuned.