How Would Tying Student Loans To Repayment Rates Affect Higher Education?

As the U.S.Department of Education considers linking colleges and universities eligibility

for federal student financial aid to the schools student loan repayment rate, some analysts are looking at just how large the student loan default problem is and what might happen if new student loan repayment rules take effect in 2012 as expected.

Defaults on student loans can be measured in a number of ways, but one of the most common measures of default is the official cohort default rate, defined by the Department of Education as the percentage of a schools student loan borrowers who enter repayment on certain federal education loans during a particular federal fiscal year, Oct.1 to Sept.30, and default or meet other specified conditions prior to the end of the next fiscal year.

In other words, the cohort default rate is the percentage of borrowers who enter repayment on their federal student loans and then either stop making payments on their student loan debt or never make payments at all during the 1224months after entering repayment.

Student Loan Default Rates vs. Repayment Rates

Government analysts now want to look more closely not at schools default rates on federal college loans but at schools repayment rates on those loans.

Consumer and student advocates have long argued that the cohort default rate, as currently measured, severely underrepresents the proportion of a schools students who are struggling with college loan debt by looking at only an initial 24-month period. The two-year snapshot, these critics maintain, misses a large swath of students who are able to muddle through making their payments for the first couple years but then begin defaulting in the third and fourth years of their repayment periods in accelerated numbers.

The default rate also fails to take into account those students who arent able to make payments on their student loans but who arent considered to be technically in default because theyve arranged for a student loan debt management plan that permits them to put off making payments on their federal college loans.

In proposed rules that would regulate a schools eligibility for federal student aid, the Department of Education would consider a schools student loan repayment rate and not simply its default rate, as current regulations do.

By expanding its institutional financial aid eligibility rules to include student loan repayment rates, the Education Department would be looking at how many students simply arent repaying their student loans not only counting borrowers who have defaulted, but including those borrowers who are in a legitimate deferred repayment plan or approved forbearance period that allows them to temporarily forgo making their federal student loan payments.

The Student Loan Debt Problem, as Measured by Repayment Rates

Earlier this year, the Department of Education reported that the national cohort default rate was 7percent for the 2008 fiscal year, the last year for which repayment data are available.

Looking at repayment rates, on the other hand, while also expanding the time span over which student loan repayment is measured, yields a far larger non-payment rate among student loan borrowers and paints a truer picture of the size of the inability-to-repay problem among student loan borrowers.

The Department of Education estimates that in 2009, among alumni of public universities who carried federal student loan debt, only 54percent of those who had graduated or left school within the last four years were in repayment on their federal student loans a far cry from the 93-percent national non-default rate of 2008.

The four-year repayment rate was marginally higher for students at private nonprofit universities, at 56percent. Perhaps predictably, the repayment rate among alumni of private for profit colleges was substantially lower just 36percent over four years.

These figures come from a new repayment database that the Department of Education will use to track government-issued student loans, from the time theyre issued until the time theyre paid off. The database can also track what happens in between.

By looking more carefully at each loans entire lifespan, the Education Department hopes the database will help identify the point at which borrowers first begin to show signs of trouble repaying their federal college loans.

Schools Student Loan Problems Could Mean Loss of All Financial Aid

As the governments proposed financial aid rules are currently worded, the new rules would allow the Department of Education to impose financial aid restrictions on schools whose overall student loan repayment rate falls below 45percent.

Schools that have a repayment rate of lower than 35percent would face the loss of federal student aid altogether.

Using the Education Departments 2009 data, more than half of the higher education institutions in the United States would face some type of federal student loan sanctions if the proposed financial aid rules were in effect today, and 36percent of post-secondary institutions would be barred from offering federal student aid for a period of at least two years.

However, the proposed new Department of Education rules will also allow schools to report student loan repayment rates separately by program. By segmenting out repayment rates by program, institutions could avoid school-wide federal financial aid sanctions, leaving intact federal student aid for academic programs whose repayment rates are within the established guidelines, while still receiving sanctions for programs whose graduates consistently fail to make payments on their federal college loans.

by: Jeff Mictabor

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