Lies, damn lies and statistics. At best, ProPublica has its statistics scrambled. Career college students have higher default rates than students attending Harvard or Yale. Big surprise. They are poorer. And they have similar default rates to students at institutions who also accept lower income students in large percentages (which, again, no surprise, does not include Harvard or Yale). In fact, 50 percent of career college students come from the lowest economic quintile. A terrible economy makes the default rates that much worse. The ProPublica story suggests that 40 percent of all federal money lent to career college students will never be repaid. This is, of course, nonsense.
No one knows what percentage of students will go into technical default, because the numbers are illustrative of what might occur, as the Department of Education has explained, if nothing is done to reverse some trends. And even students who default ultimately repay the Federal government because the obligation remains in force and the federal government is excellent at debt collection.
It’s true default rates for proprietary schools have risen both since 2003 and with the new three-year calculation change, but so have rates for all sectors of higher education during the same time period. The overall Budget Lifetime Default Rate actually shows a rise in CDRs in all sectors from 11.5 percent in 2003 to 15.3 percent in 2007. In fact, graduate students, the group ostensibly most likely to repay their loans, have seen their ranks of defaulters among borrowers double since 2003. Why? It’s the economy. The economy does not discriminate among types of schools. If the reported rates took into account the profile of borrowers and defaulters, the cohort default rates for for-profit students would be substantially similar to community college students and those attending Historically Black Colleges and Universities. In addition, many community colleges refuse to participate in the Federal student lending program out of concern that high defaults will reflect badly on them or lead to loss of Title IV eligibility. Such a move helps mask some of the costs that come with admitting low-income students who otherwise have no higher education opportunities. As the Government Accountability Office, Congress’ watchdog, testified at a recent Congressional hearing, it is student demographics, not the type of ownership of an institution, that explains variation in default rates.
Another factor is that the elevated cohort default rate is a matter of basic mathematics. CDRs are calculated by dividing the number of borrowers into the number of defaulters. Given that the number of borrowers in any cohort remains fixed and that the number of defaulters in the cohort naturally increases over time, the default rate has nowhere to go but up. The adjustment in moving from two years to three years necessarily increases the number of defaulters as a percentage of borrowers.
In assessing the Cumulative Lifetime Default Rate from 2003 to 2007, proprietary schools are actually experiencing a decline. Whereas the estimated lifetime rate was 26 percent for proprietary schools in 2003, that rate now stands at 15.7 percent. Current two-year public and private institutions’ rates stand at 14.1 and 14.3 percent, respectively. Those numbers hardly stand in strong contrast to one another. That trend may reverse as the recession roils the waters for working Americans, but such a shift will be caused by the economy and the type of student demographics, not the quality or tax status of the schools.
The Career College Association is not satisfied with cohort default rates as they exist today, nor should anyone involved. Default rates reflect a challenge in a system of opportunity and upward mobility that serves students, institutions, employers, and taxpayers. Graduates generally enter a career of choice at the lowest rung of the compensation ladder. This will change as individuals advance, but until recently loan forbearance was the only tool available to help borrowers cope with student loan debt. The Income Based Repayment plan, that took effect July 1 of this year, presents a far more practical approach to loan repayment and, we believe will help reduce cohort default rates. The Income Based Repayment plan allows students to pay lower amounts when they first graduate and have a lower earning capacity, with payments increasing as earnings increase. New provisions of the law also permit students who enter public service to have their loans reduced or even eliminated. CCA is also taking several steps to work with its members to lower rates. For several years, CCA has had an active Default Prevention Initiative, in conjunction with the Department. We work aggressively as an Association and as a sector to minimize student defaults. Allowing lower tuition schools to limit federal student borrowing, not permitted under current regulations, would also help alleviate the cohort default rate situation. Unfortunately, students use student aid to cover other expenses not related to tuition and fees. Student aid programs are not consumer lending programs and the proceeds of the former should remain concentrated on true postsecondary expenses.