Student loan defaults are down. Here's why that's a bad thing.
Last week the U.S. Department of Education released its most recent Cohort Default Rate (CDR) statistics for U.S. colleges and universities. As federal stats go, they’re practically catnip to pundits and the press because students at institutions where rates are too high risk losing access to federal grant and student loan aid. Given how much people borrow to pay for college today, revoking an institution’s eligibility ends being nothing short of a death sentence as we saw recently with ITT.
This year’s numbers (the FY2013 cohort) show the national 3-year CDR now stands at 11.3 percent, which is down from 11.8 percent last year.
For some, any drop is a good drop; still it’s hard to get excited about a half-percentage point decline when you think about the sheer amount of effort and dollars the administration’s put into getting us here.
In the past eight years alone we’ve seen no less than three programs introduced that cap borrowers’ payments based on their monthly incomes. The cost to taxpayers? Upwards of $20-billion.
For that kind of money there shouldn’t be any defaults (no really, they could’ve spent those dollars just paying off the loans) yet that’s only the tip of the iceberg when it comes to the amount of help that struggling borrowers get.
To even get to default a borrower has to have not made a monthly payment for almost an entire year and ignored several hundred offers of help in the form of calls, text messages and letters from his servicer. Yes, several hundred. Not only that, he has to have passed on some 56 different repayment or economic hardship options put in place specifically to prevent this very thing from happening.
We’re talking about an obligation from the federal government folks, not a loose promise to pay your grandmother back. Nobody forgets they have such a debt and even if they did no lender would ever let them.
Look, everyone misses a loan payment here and there. We all get that. Shoddy degrees aside, pinning defaults squarely on schools though blatantly ignores the fact that defaulting on a federal student loan in the face of so much assistance and generosity requires an almost unbelievable level of personal disregard.
The unaffordable payment myth
One thing we have learned over the past couple years is that defaults aren’t driven by large loan balances or unaffordable monthly payments. Not only does the research show that it’s the people who borrow the least that tend to default the most but it also shows that all things being equal, monthly loan payments aren’t any more of a burden today than they were 20 years ago (see chart below).
These are the kinds of results that make policymakers cringe because they almost single-handedly call into question an entire decade’s worth of federal student aid policy. For repayment options to have only become more generous and monthly payments not being any more of a hassle today than they were in the early 1990s, it makes zero sense that defaults should be higher today than they were a decade ago.
Then there’s the historical data. If affordability really was the problem why were default rates lower before widespread access to income-based repayment came into being back in 2009?
That income-based repayment emerged at the onset of the Great Recession was nothing more than a fortunate coincidence and regardless, that ended seven years ago. Even if you could connect those dots, that still doesn’t explain why defaults had been climbing a full three years before the recession even began.
What’s most fascinating about the historical trend in defaults is what you can’t see: the loose pattern going all the way back to the mid-1980s where federal efforts to make student loan repayment easier have been oddly followed by increases, not decreases, in default rates.
What happened in the run-up to defaults peaking at 22 percent in 1990? Congressional action in the mid- to late-1980s that not only extended the delinquency period from 120 to 180 days, but also broadly expanded loan deferment and dependent undergraduates’ access to supplemental loans.
In the years leading up to next rise in defaults between 2004 and 2010, Congress again increased the delinquency period - this time to 270 days - but also gave borrowers the ability to receive a “verbal” forbearance and first started requiring servicers to offer all borrowers income-sensitive, graduated and extended repayment options.
As for the 13-year run of consecutively declining defaults in between? It happened to correspond to the time when student loan servicing and collections practices were standardized, wage garnishment was introduced, the statute of limitations on repayment enforcement was lifted and loan collection compensation structures became more generous.
It’s a difficult thing to accept but it’s getting harder and harder to ignore the possibility that the federal student loan program itself is to blame for the very problem it’s now desperately trying to solve.
A flawed and unfair measure
One thing we do know about student loan defaults is that they tend to be correlated with the number of people who enroll in college but never complete a degree. That makes sense seeing as these students took on debt but never earned the credential they needed to earn the higher salary that would help pay the loan off.
What doesn’t make a whole lot of sense is including those people in a college’s default rate. While CDRs may track defaults their purpose is actually to help determine whether borrowers with degrees are getting something back for their investment.
People buy services all the time that they end up abandoning. Try to imagine credit card companies telling L.A. Fitness that people can’t finance their memberships because too many people who signed up after New Year’s with a credit card never set foot in the place again.
In the end, lumping everyone together in a calculation like this does more than just distort these rates, it unfairly penalizes schools that are more likely to enroll at-risk students like community colleges, for-profit providers and even non-selective 4-year institutions.
The only way including non-completers works is if it’s possible to show students left because they were duped into buying a bad bill of goods. That’s not only impossible but it also goes against all the research showing students are more likely to drop out for reasons unrelated to their academic experience.
A better way forward
Default rates are bad measures but not because institutions can supposedly manipulate them. They’re bad because they don’t accurately reflect the value for money that schools provide and because it’s increasingly clear that defaults have far less to do with school quality than they do personal attitudes towards managing debt.
If Congress and the Department of Education want to produce meaningful default rate measures, they should start by pulling out of the calculation students who don’t complete a degree program. It’s more accurate and would create a far more valid lever if the goal is to determine whether students at these institutions should be eligible for federal student aid.
On a deeper level, it’s clear that federal efforts over the past decade to stem the default tide aren’t working and pumping billions of taxpayer dollars into programs that only yield incremental results is starting to look more like political stubbornness than rational or even sensible policy.
If history’s any guide, real declines in student loan delinquencies and defaults won’t happen until policymakers are willing to take the bold steps to make student loan repayment look more like traditional loans, not less.
Note: this is a cross-posting of an article first published on LinkedIn