Yesterday, the Federal Education Budget Project, Ed Money Watch’s parent initiative, published the latest two- and three-year cohort default rates for every institution on its comprehensive higher education database. The percentage of students who enter repayment in a given year and default on their loans within either two or three years—the cohort default rate—is meant to ensure that institutions whose graduates cannot repay their loans are ineligible for federal student aid. What do the latest data tell us about institutions with particularly high default rates?
Currently, schools with two-year cohort default rates of 25 percent or above for each of the past three years, or over 40 percent for a single year, stand to lose eligibility for federal student loan and grant programs. Beginning in 2014, however, schools will be assessed using a three-year default rate. Schools with a three-year default rate of 30 percent or higher for three years in a row, or over 40 percent in a single year, would become ineligible for student loans and grants.
Policymakers adopted the three-year rate as a more accurate measure than the two-year rate, because borrowers can use deferment and forbearance options and thereby postpone default beyond two years even though they have inadequate means with which to repay their loans. In the past, the U.S. Department of Education has published three-year rates only for informational purposes. But the recently-released official rates will eventually be used to measure individual schools once three years of information is available. The three-year rate shows the percentage of students from the 2009 cohort who defaulted on their loans by the end of fiscal year 2011. These rates capture more defaults over a longer period of time, perhaps providing a better picture of defaults for a given institution.
A close examination of the three-year cohort default rates mostly confirms what confirms what many stakeholders already believe – the 302 institutions with high three-year default rates serve more disadvantaged students and these students rely on federal aid more than their counterparts at institutions with lower default rates (see table below).
But the data also reveal one surprising finding in particular. Institutions with three-year default rates at or over 30 percent have slightly higher graduation rates than those with lower default rates – 56.9 percent compared to 53.0 percent. Though graduation rates are usually an indicator of a high-performing institution, this could also mean that institutions with higher default rates have a lower threshold for graduation, their students graduate with credentials that are of insufficient value in the labor market, or both.
The pattern is even more pronounced at the 68 institutions with three-year default rates over 40 percent (which, starting in 2014, would earn them an immediate removal from federal aid eligibility). At these institutions, the average graduation rate is 62.5 percent, compared to 53.1 percent at institutions with lower default rates.
That is a troubling pattern indeed. If low-quality institutions continue to flood the market with graduates at a higher rate than higher-performing institutions, competition for a limited number of jobs will become even steeper among those graduates. This will most directly hurt the students from the low-performing institutions who likely have credentials that are less valuable in the market place, reinforcing the cycle of high default rates.
These findings should be a wake-up call for institutions with high default rates coupled with high graduation rates. They are doing their students a disservice by so readily handing out low-value degrees.