Tough Love on Student Loan Repayment Rates

Federal Policy

September 25, 2015

By Mary Nguyen Barry

When my colleague and I wrote our Tough Love report last year, we recommended the federal government draw a line at the bottom 5 percent of four-year institutions in terms of their performance in carrying out the core purposes underlying federal student aid: low-income student access, student graduation, and student loan repayment.

The bottom 5 percent of colleges would then be given a dose of Tough Love. Either improve over a set period of time – to show they could still provide students and taxpayers with some minimal value – or eventually lose access to various forms of federal financial aid. Under-resourced colleges, such as many minority-serving institutions, should receive additional financial and technical assistance before any consequences attach.

At the time, student loan repayment rate data was not available to calculate a bottom 5 percent benchmark so we took a look at very suboptimal cohort default rate data. But now, loan repayment data by institution is available thanks to the newly released College Scorecard. Now, we are finally able to identify the country’s lowest four-year college performers in terms of return on investment: colleges where more than 62 percent of former students cannot pay down any principal on their student loans. In other words, these are colleges where 62 percent of students who borrowed to enroll end up in a much worse financial situation than when they first enrolled.

Loan repayment rate data is crucial to our full understanding of problems facing our higher education system; it can pinpoint colleges that not only have degree production issues but also quality degree production issues, as measured by students’ ability to make progress on paying down their student debt.

Yet our federal accountability system – to the extent there is one – is still based on an antiquated measure of cohort default rates that only captures the worst possible outcome among student loan borrowers: those who cannot make a student loan payment for 9 consecutive months. Colleges with a default rate above 30 percent for three consecutive years or 40 percent in any one year can lose access to federal student aid. What’s more is that we know default rates are easily gamed – colleges have been documented to push students into deferment or forbearance so that they will not show up in the default calculation. Only about 20 schools have been subject to sanctions from the most recent cohort default rate standard.

Currently, there is a bipartisan bill to replace our federal accountability system based on default rates with one based on student loan repayment rates. Called the Student Protection and Success Act, it was co-sponsored by Senators Jeanne Shaheen (D-NH) and Orrin Hatch (R-UT) and is currently under committee consideration. They propose that schools with repayment rates more than 10% below the national average over a three-year period lose eligibility to participate in the Title IV federal student loan system. The problem with that bill though is that it’s Tough, but it doesn’t provide much Love in terms of added support for institutions that are failing because they are grossly under-resourced.

It’s easy for politicians to be tough, and it’s easy for advocates to call for more love. It’s hard to embrace Tough Love, but it’s the right thing to do for students and taxpayers alike.