There is a growing consensus that cohort default rates are at best an imperfect measurement of a higher education institution's academic quality and no longer accurately reflect a borrower's ability to repay their student loans from a given institution.
While default rates — published each year by the Department of Education (ED) — are intended to provide data points on the percentage of a school's borrowers who default on their loans early on in repayment, many believe they don't provide the full picture of how borrowers experience and struggle with loan repayment. Those are the feelings from several financial aid administrators who submitted their feedback as part of NASFAA's ongoing "Your Thoughts" initiative.
"[Cohort default rates] are only a minor indicator of success in repaying student loans. In fact, institutions that intensely focus on it — because that is what is most prominently disclosed and regulated — are doing students and themselves a [disservice]," said Jeff Arthur, vice president of regulatory affairs and chief information officer at East Coast Polytechnic Institute.
One major issue several in the financial aid profession identified is the fact that there are several repayment options available, with some not requiring borrowers to make payments on the principal of their loans after leaving school, depending on their income. If cohort default rates are a de facto measure of an institution's ability in setting students up for success, paying down a portion of the principal loan balance should also come into play in that judgment, some have argued.
NASFAA has spoken out about the fact that the current litany of repayment options is confusing for borrowers. In its policy priorities for reauthorization of the Higher Education Act, NASFAA recommends consolidating and simplifying the current federal loan repayment plans, solidifying Public Service Loan Forgiveness, exempting all loan forgiveness from the calculation of gross income for income tax purposes, and continuing forward with ED's steps toward improving federal loan servicing.
Ben Reppe, assistant director of financial aid at Kennesaw State University, said default rates don't capture the likelihood of a borrower making progress in repayment.
"We know that non-completers tend to default at higher rates, though generally on lower debts. Many of these tend to be collected later," he said. "On the other hand, many graduates with six figure debts are relying heavily on income-driven repayment plans while counting on loan forgiveness."
Community colleges in particular experience challenges with cohort default rates that don't accurately reflect their students' repayment ability, said Aurie Clifford, assistant director of Title IV compliance at Pima County Community College. The community college sector has also criticized the CDR metric because fewer of their students take out loans. With a smaller pool of borrowers, each default makes a more noticeable mark on the overall percentage.
"We are especially susceptible to fraud because, in general, we have open admissions policies and fluid or flexible student enrollment," she said. "Fraud affects so many colleges in the first and even second year of your CDR because many schools are not able to identify patterns until the fraudulent student records are in default."
Additionally, if an institution's goal is to provide a broad range of students — particularly underserved populations — access to higher education, then a default rate isn't an appropriate metric for measuring the success of that mission, Arthur said.
"Institutions can do a great job with higher graduation rates and employment rates for these students, but pay a perceived price with their default rates," he said. "However, using the easy tools to reduce your cohort default rate may create a false measure of your students' overall success with student loan repayment."
To better capture the full picture of a borrower's ability to repay their loans, Reppe suggested implementing better accountability measures to gauge things such as the percentage of loan principal repaid by cohort and the percentage of borrowers making an acceptable dent in loan principal.
"These measures used in tandem would provide a better sense of loan performance by school and would be hard to game," he contends.
These ideas have also garnered bipartisan support in Congress, although lawmakers have struggled to nail down exactly how a repayment rate would be calculated and applied.
Instead of focusing on how to help students avoid falling into default on their loans, Arthur suggests the focus should be on the student loan process in general, noting that the mission of student loan services is to balance things like default rate, repayment rate, retention, and graduation, and ultimately students' ability to find a job after graduating.
"The goal … is to help students however we can to improve all of these outcome metrics. Too intensely focusing on cohort default rates may compromise some of these other outcome metrics," he said. "A higher cohort default rate is OK if you are able to impact long-term student loan repayment success, income, and college completion."
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Publication Date: 10/19/2020