As the pause on federal student loan payments and interest accrual continues, some policy experts are calling for federal leaders to take the opportunity to rework accountability metrics tied to student loan default and protect students from poor outcomes.
With a large swath of the federal government’s student loan portfolio continuing to remain paused, through the continuation of the moratorium on payments and interest accrual, some policy experts are calling for federal leaders to tailor accountability metrics for institutions of higher education to protect students from poor outcomes.
A new white paper from Third Way, a public policy-focused think tank, is specifically calling for the cohort default rate (CDR) to be improved and reworked before the payment pause ends to ensure students and taxpayers are protected from wasting money on poorly performing schools.
The accountability metric has been a useful tool for capturing student outcomes, but since no federal student loan borrower has been required to make payments for more than two years, there have been no new defaults. As a result, the metric will less accurately reflect the financial well-being of borrowers for the next several years.
Third Way argues that now is the optimal time to implement a change to the metric because CDR cannot be used to penalize schools for several years, allowing them the time to implement any changes.
“This is the perfect window of opportunity to improve the CDR measure, as schools will be held harmless for at least the next five years, giving colleges and universities plenty of time to adjust to and implement a new measure,” the paper explains, providing a background of how the rate is calculated. “If policymakers do choose to use this timeframe to improve the CDR, there are several options on the table to do so.”
Specifically, the paper calls for three key reforms, the first of which is to close the metric’s forbearance and deferment loophole that allows programs to ensure borrowers’ eventual defaults are simply pushed off until the three-year tracking period expires.
Third Way also calls for policymakers to include borrower repayment rates to measure how many students have repaid at least one dollar of their student loan principal after a certain period of time, which provides a more nuanced picture than simply counting those who default.
The paper’s third suggestion for improving accountability would be for the Department of Education (ED) to use data to flag schools at risk of failing CDR for targeted scrutiny.
In addition to CDR reforms, Third Ways calls for additional metrics to focus on earnings and price to identify schools or programs that leave their students at higher risk of loan default and head off unmanageable debt before it starts. These new reporting metrics would include a price-to-earnings premium, debt as a percent of earnings, and a new earnings premium.
“The student loan payment pause has eased some of the burdens placed on students during the pandemic, but it has also resulted in the unintended effect of rendering the CDR guardrails ineffective for at least the next five years,” the authors write. “Policymakers should leverage this moment for a reset, to fix the current metric and consider additions to it so that accountability doesn’t lag for an extended period at the expense of protecting students and taxpayers.”
Publication Date: 6/16/2022