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New Data On Student Loan Defaults

Compiled By Yaffa Klugerman
December 14, 2009

The U.S. Education Department is releasing data today which indicates that students who took out federal loans to attend for-profit colleges have higher default rates than those who attended public or private non-profit institutions.

The information was released to allow institutions to prepare for a new law which will take effect in 2014. According to the current law, colleges which have high default rates over a period of two years may become ineligible for student loans and Pell Grants. The new federal law will impose these sanctions based on three-year rates instead, which are typically higher. Consequently, colleges with default rates of 30 percent or higher for three consecutive years would be ineligible for federal aid.

The new data were unofficial and will not result in sanctions. "This is purely information," explained Dan Madzelan, acting assistant secretary for postsecondary education, who was quoted in USA Today. "We think it is a good idea for institutions to begin to understand what the change. . .means for them."

According to the newly-released data, the change in the law would have significant ramifications for many institutions. The Chronicle of Higher Education points out that according to the data, more than 220 colleges would be in danger of losing federal financial aid--more than six times the number exceeding the current limit based on a two-year period.

Moreover, the new law would be particularly threatening to for-profit colleges. The Wall Street Journal reports that based on the data, students who took out federal loans to attend for-profit colleges had a 21 percent default rate in the first three years they were scheduled to repay the loans. The figure was about three times more than the three-year default rate at public and non-profit schools.

Experts were quick to point out that the new information was unfairly biased against colleges which serve lower-income populations. "The only thing that explains default rate is the socioeconomic background" of the student, noted Harris N. Miller, president of the Career College Association, who was quoted in the Chronicle. "By using that as the metric of quality, you will always be discriminating against low-income students."

And Debbie Cochrane, program director of the Project on Student Debt, cautioned that it's important to see the whole picture of what the numbers represent. "A 30 percent cohort default rate [has a ] very different [meaning] at a school where 90 percent of students borrow," she told USA Today, "compared with a school where 5 percent borrow."

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