Last modified: Wednesday, January 30, 2008
Bad loans don’t mean bad institutions
IU School of Education researchers find default rate is poor predictor of institutional quality
FOR IMMMEDIATE RELEASE
Jan. 30, 2008
BLOOMINGTON, Ind. -- A new study from researchers at the Indiana University School of Education finds no linkage between the type or quality of educational institutions and the rate at which borrowers default on their student loans.
The Career College Association (CCA) commissioned the study. Don Hossler, professor of educational leadership and policy studies and director of the Project on Academic Success, led a team that conducted a literature review of 41 studies of student loan default between 1978 and 2007.
Don Hossler
"When it comes to understanding why borrowers default on their student loans, several issues matter and others, at least according to high-caliber research, do not," Hossler said. "The empirical evidence suggests that default rates are not good vehicles for assessing the quality of institutions."
The study comes as Congress debates the reauthorization of the Higher Education Act, the law behind much of federal student aid. An amendment to the act would extend the calculation of student loan cohort default rates (CDR) from two years to three. The U.S. Department of Education uses those rates as a factor in determining institutional quality. Institutions with a CDR of 25 percent for three consecutive years or 40 percent for any one year would lose access to Title IV funds, which includes Pell Grants. The department estimates extending the calculation will increase CDR by 60 to 98 percent.
"If you extend it to three years and the default rate goes up but the thresholds remain the same, more institutions are going to exceed those default thresholds and therefore, students going there won't be able to participate in federal financial aid programs," Hossler said. "This is not just a career college issue. It's an issue for almost any institution that serves primarily urban, low-income, commuting students."
"While some may wish to extend the cohort default rate calculation period as a way to punish career colleges, there is no evidence that links educational quality or type of institution with loan repayment rates," said CCA President Harris N. Miller. "At a minimum, the issue of extending the default rate calculation deserves careful deliberation and additional study. A rush to judgment will only hurt tens of thousands of working-class and low-income students by foreclosing their higher education options."
The study did come up with some other findings:
- Students who earn a postsecondary degree are considerably less likely to default than those who don't graduate.
- Total level of debt (including consumer and home mortgage debt) and income level of students once they leave are just a few of a complex web of factors that determine the likelihood of default.
- A bigger loan doesn't make default more likely. Drop-outs generally accrue less debt while graduates accrue more debt. Graduate students accrue high levels of debt but are unlikely to default.
- When the characteristics of the students are taken into consideration, institutional characteristics aren't strongly indicative of default. Commuter institutions, historically black colleges or universities, or proprietary schools may admit students who have characteristics when they begin study that place them at greater risk of default.
- Some evidence suggests African-American and Native American students, who are more likely to be older, have lower incomes, and have higher debt levels, are more likely to default.
- Little evidence suggests the types of loans or having multiple types of loans makes defaulting more likely.
- Modest evidence shows students who participate in loan counseling programs are less likely to default.
Hossler said the findings indicate higher education and government leaders need to further investigate the methods of making higher education more achievable for students who don't have financial resources.
"We already know that people who come from low-income backgrounds are more likely to default on loans," he said. "So the real question is, if we really are trying to use loans as a vehicle for access, what are acceptable default rates, understanding they're going to be higher than they are for the more affluent population?"
The Career College Association is a voluntary membership organization of accredited, private postsecondary schools, institutes, colleges and universities that provide career-specific educational programs. The CCA Web site is www.career.org.
More information about the Project on Academic Success is available at https://pas.indiana.edu.
Media outlets: the following comments are available as mp3 files on the IU School of Education Web site at https://site.educ.indiana.edu/news/tabid/5663/Default.aspx. Look for the story headline under "Podcasts."
Hossler said the study indicates more discussion is needed about the method for getting money for higher education to underserved groups:
"This is not rocket science. We already know that people who come from low-income backgrounds are more likely to default on loans. So the real question is, if we really are trying to use loans as a vehicle for access, what are acceptable default rates, understanding they're going to be higher than they are for the normal population?"
There are other ideas being discussed, Hossler says, including one from a UCLA public policy professor who wrote a book called "The Price of Admission: Rethinking How Americans Pay for College":
"Tom Kane at UCLA has argued forcefully for income-contingent loans, so that people with lower incomes might have longer time-spans to pay off than conventional approaches that usually are looking for 10-year payment cycles and so forth. So people are looking at a lot of different alternatives. We don't address that in this report, but it's all part of this context of how do we finance access."
Hossler says the change in federal policy could seriously impact how many students can get loans in the future:
"If you extend it to three years and the default rate goes up but the thresholds remain the same, more institutions are going to exceed those default thresholds and therefore, students going there won't be able to participate in federal financial aid programs. And again, this is not just a career college issue. It's an issue for almost any institution that serves primarily urban, low-income, commuting students."
