JSFA Study Explores Change in Share of Federal Financial Aid Sent to Institutions with High Student Loan Default Rates

Quick Takeaways: 

  • In 2013-14 the share of student loans disbursed by institutions with medium or high CDRs decreased moderately as the job-market recovered.
  • Analyses suggest that CDRs are sensitive to economic conditions, which institutions cannot control. 
  • To avoid the penalties associated with CDR policy, financial aid offices should have someone on staff (likely the director) with a strong understanding of federal CDR policy rules and institutional practitioners should remain abreast of current debates about Title IV legislation and regulations. 

By Charlotte Etier, Research Analyst, and Brittany Hackett, Communications Staff 

A study in the most recent Journal of Student Financial Aid found that in academic year 2007-08, 89 percent of the $72 billion in total federal loan aid was awarded to low-cohort default rate (CDR) institutions (those with CDRs below 15 percent). By 2012-13, only 75 percent of the $91 billion in federal loan aid was disbursed to low-CDR institutions, meaning institutions with medium or high CDRs disbursed one in every four student loan dollars. However, in academic year 2013-14 the share of student loans disbursed by institutions with medium or high CDRs decreased moderately. "Paying for Default: Change Over Time in the Share of Federal Financial Aid Sent to Institutions with High Student Loan Default Rates" by Ozan Jaquette and Nicholas W. Hillman also concluded:

  • Private nonprofit and public four-year institutions with low CDRs received the vast majority of federal grants and student loans disbursed from 2007-08 to 2013-14.
  • In community college and for-profit four-year sectors, the share of federal grants and student loans disbursed at institutions with CDRs greater than 15 percent increased substantially from academic years 2007-08 to 2012-13, but declined somewhat in academic year 2013-14. These trends seem to mirror trends in national unemployment rates. 

Jaquette and Hillman used data from the Integrated Postsecondary Education Data System (IPEDS) and the Office of Federal Student Aid (FSA) on Title IV financial aid disbursements and three-year CDRs (all financial data was inflation-adjusted to 2012 dollars using the Consumer Price Index) to look at to what extent federal student aid was disbursed among colleges with “low,” “medium” and “high” CDRs, whether it has changed over time, and how the trends differ across sectors.

The study does not identify the extent to which fluctuations in the economy or revised federal policy rules, such as the change from two- to three-year CDRs that occurred in fiscal year 2011 and replacing the 25 percent threshold in effect for FY 1994 through FY 2011 with a 30 percent threshold for FY 2012 onward, caused changes over time in the flow of federal aid to institutions with problematic CDRs. 

The fiscal year FY 2011 three-year cohort default rates, released in September 2014, showed a national default rate of 13.7 percent, down from 14.7 percent in FY 2010. When broken down by institution type, the data show decreases in the borrower default rate for all sectors. Public institutions had a CDR of 12.9 percent in FY 2011, compared with 13.0 percent in FY 2010, while private institutions saw a drop from 8.2 percent in FY 2010 to 7.2 percent in FY 2011. Proprietary schools dropped from 21.8 percent in FY 2010 to 19.1 percent in FY 2011. Since the CDR metric was implemented, twenty-six institutions have been barred from receiving financial aid based on having CDRs of at least 30 percent for three consecutive years or at least 40 percent for the latest year. 

Future research could shed light on the extent to which fluctuations in the economy or revised federal policy rules affected CDRs by identifying which institutions stopped participating in specific federal aid programs over the past decade and analyzing whether these institutions opted out voluntarily or whether they lost eligibility due to violations of particular Title IV eligibility policies.

The federal government’s CDR policy is one of the few tools it has to ensure colleges are accountable for the loans they disburse. The analysis from this study could inform debates about how CDR policy could be revised in the future. Jaquette and Hillman put forth several policy implications, as well as implications and recommendations for practitioners.

Policy Implications:  

  • Evidence from this study can frame future policy debates about CDR rules
  • One critique of federal CDR policy is that student characteristics, rather than institutional behavior, largely determine CDRs
  • The federal government could consider alternative strategies to induce colleges to comply with federal policy goals, including:
    • Current thresholds for Title IV sanctions (which treats a college with a CDR of 16 percent the same as a college with a CDR of 29 percent) may not provide a strong enough incentive, but a more gradient structure (i.e., 15  percent to 20 percent, 25 percent to 25 percent, etc.) could help federal policymakers monitor colleges more closely and offer incentives for moving to the next-lowest CDR band. 
    • Consider weighting CDRs according to the percentage of students who borrow at a given institution.    

Practitioner Implications/Recommendations: 

  • To avoid the penalties associated with CDR policy, financial aid offices should have someone on staff (likely the director) with a strong understanding of federal CDR policy rules.
  • Institutional practitioners should remain abreast of current debates about Title IV legislation and regulations, and should seek opportunities to contribute to these debates.

NASFAA has continued to advocate for streamlining student loan repayment by establishing a single income-based repayment plan to ensure that inability to repay would no longer be a reason for default. A recent report from our Servicing Issues Task Force included recommendations related to using new technologies to experiment with developing innovative and effective performance based delinquency and default prevention activities and in lieu of certain current prescribed requirements. 

Members also have several opportunities to become more well versed in CDRs including an upcoming Cohort Default Rate Issues webinar scheduled for May 20, 2015. As reauthorization continues NASFAA will continue to keep members informed of developments so they may contribute to these debates.

 

Publication Date: 4/6/2015


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