This week, the U.S. Department of Education will release data on the percentage of borrowers who have defaulted on federal student loans over the last three years. Schools with high rates of default face consequences.
There are new standards. According to Nick Hillman, an assistant professor at the University of Wisconsin-Madison School of Education, a college doesn’t want its default rate to hit 40 percent a year, or 30 percent over three years: “They eventually could lose access to not just their student loans, but also Pell Grants and other types of federal aid, which can rack up to millions of dollars, depending on the institution.”
If a school is worried about its default rate, Hillman says, that institution will try hard to lower it. “There’s a lot of gaming that can happen, and just really weak incentives and penalties involved with current policies,” he says. Schools can push students to ask for forbearance, or defer payments.
According to Thomas Weko, a managing researcher in the American Institutes for Research’s education program, “Not that many institutions fail to meet this test.” After the government released the last data set on default rates, it penalized eight schools out of some 6,000. Weko says a school that is worried about its default rate can hire consultants for tracking borrowers who are at risk of default, “doing sort of briefings and trainings with students.” A college that can’t lower its default rate, Weko adds, definitely has problems navigating the federal financial aid system.
“It’s like knowing where the speed camera is, and still getting it wrong,” he jokes.
According to Jacob Gross, a professor in the University of Louisville’s College of Education and Human Development, this highlights a bigger issue. “I think a real important part of this debate is whose fault is default,” he says.
Is default the student’s burden? Or the institution’s? And the federal government doesn’t always consider a would-be borrowers’ credit risk the way private lenders can.