Ben Miller, writing for Chronicle of Higher Education, explains how colleges can artificially keep their student-loan default rates down, hiding the fact that a lot of their students are not paying back their loans. As Miller points out, DOE's student-loan default measure only calculates the percentage of defaulters who default within three years of beginning repayment--which is a very short window of time.
[B]ecause the measure tracks results for such a short time, it is possible for colleges to game the metric by artificially lowering the number of students who default within three years. How? A college can encourage borrowers to ask for a forbearance--an option in which the federal government allows borrowers to stop making payments without their loans becoming delinquent or heading toward default. Since it takes almost a year to default, the college needs borrowers to enter forbearance for a couple of years, ensuring they cannot show up in the default rate, even if they never make a single payment.In fact, as Senator Harkin's Senate Committee documented in its report on the for-profit college industry, many for-profits aggressively encourage students to apply for economic hardship deferments, which are ridiculously easy to obtain.
That is probably why the three-year student-loan default rate for for-profits actually went down a bit according to DOE's 2014 student-loan default rate report. The for-profits are adept at getting their former students to sign up for economic hardship deferments that obscure the fact that these students are not making their loan payments.
Miller argued persuasively that a better measurement of student-loan defaults would be compare the number of students going into repayment at a college compared to the number of graduates. Students who are going into repayment without graduating have lower rates of success than graduates in terms of getting good jobs, and they also have higher student-loan default rates. Therefore, a college that has a high level of students beginning repayment compared to the number of graduates is probably a college that has a high student-loan default rate.
So what did Miller find? Among public 4-year institutions, 84 students went into repayment for every 100 graduates. But in the 4-year for-profit sector, 233 students went into repayment for every 100 graduates. In other words, more than twice as many students attending 4-year for-profit institutions began repayment (in the most recent cohort of borrowers) than obtained degrees.
That is a very bad sign, and a strong indicator that the for-profits have much higher student-loan default rates than DOE's anemic metric shows. It seems reasonable to conclude that the true student-loan default rate in the for-profit sector is at least twice as high as DOE reports; it is probably at least 40 percent!
The Obama administration surely knows that the number of students who default on their loans is much higher than DOE reports every year and that the true default rate for students who attended for-profit institutions is alarmingly high.
But so far at least, the for-profits have evaded effectively regulation; and they have hidden their true default rates by encouraging their former students to sign up for economic hardship deferments. Meanwhile they suck up about one quarter of all the federal student-aid money while only enrolling about 11 percen of all the post-secondary students.
Some day this house of cards will collapse, and the public will realize that the for-profit colleges have unacceptably high student-loan default rates. And we will have to face the fact that millions of people --mostly low-income and minority students--have defaulted on their loans and have had their lives wrecked by the fact that they attended for-profit institutions.
Ben Miller. Student-Loan Default Rates Are Easily Gamed. Here's a Better Measure. Chronicle of Higher Education, March 26, 2015.