Cohort Default Rates: Bad News All Around, Worse at For-Profits

When the proposal to expand the cohort default rate measurement from two years to three first came out, for-profit colleges protested vehemently that the new metric would paint them in an unfavorable light. A look at the new trail three-year rates released today by the U.S. Department of Education reveals that they certainly had reasonable cause for concern.

According to that data, more than one out of every five borrowers in the 2007 cohort at a for-profit institution defaulted on their debt within three years of leaving school. This figure is nearly 10 percentage points higher than the overall figure and is more than double the comparable rate at either public or private, not-for-profit institutions.

The table below shows the difference between the two-year and three-year cohort default rates by type of institutions.

Taking a deeper look at the data shows that regardless of sector, for-profit institutions had three-year cohort default rates that were well above either public or private not-for-profit schools. These gaps were especially pronounced at institutions that offer programs of four years or longer or at two year schools. In the former, students from for-profit institutions had a three-year default rate of 18.5 percent, double the rate at publics (7.1 percent) and nearly triple the mark at private, not-for-profits (6.3 percent).

Perhaps even more surprising is the differences in default rates at two-year institutions. Given arguments about the importance of income in determining default, one would expect these rates to be somewhat similar, as students at public two-year community colleges likely have similar demographic backgrounds as those at for-profit schools of a similar length. An analysis of the data, however, shows that two-year for-profit institutions had a default rate of 23.4 percent, well above the figures of 16.2 percent and 14.7 percent recorded at public and private, not-for-profit schools, respectively.

The worst performance of any sector was the 25.4 percent default rate recorded at for-profit schools of less than two years. Having more than one out of every four borrowers default on average should certainly raise concerns from federal officials about what is going on at some of these institutions. (While the private, not-for-profit result in this sector is also disappointingly high, it represents a sample of only 3,800 borrowers compared with more than 162,000 in the for-profit group.)

The table below shows the two- and three-year cohort default rates for institutions broken down by sector.

No One is Off the Hook

The results at for-profit institutions under the three-year measurement are certainly worrisome, but every single institutional sector has a larger problem with defaults than anticipated. Even private, not-for-profit schools of four years or more, the sector with typically the lowest default rates, saw the percentage of its borrowers that are failing to repay increase 70 percent when going from two years to three. The smallest percentage increase occurred at public two years, which had a 63 percent jump in going from 10.0 percent to 16.2 percent. At the other end, the largest percentage increase occurred at for-profit two years, which grew by 99 percent in going from 11.8 percent to 23.4 percent. Clearly the problem of student loan defaults is not a one or two year solution, but something that must take a longer-term outlook.

There are a couple of other things worth taking away from these early three-year results. First, the similarities in default rates between public and for-profit two year institutions disappear when using the longer measurement window. What starts as a 1.8 percentage point gap under the old formula increases to 7.2 percent with the new data. Since these two sectors compete over similar types of students, this suggests that initial default rates may be predicated upon income and demographics, but that longer-term measures may have a greater dependence upon some other influence that has yet to be identified.

Second, the problem of student loan defaults is in the long-term should be getting more attention. In 2005, the cohort default rate appeared to be only 4.6 percent, one of the lowest figures ever recorded. But adding just one more year to that calculation shows that the rate actually jumped to 8.4 percent, a substantial increase. Given the large size of the rate of change, one must wonder what the numbers would look like if a fourth or fifth year were added. Even if the growth in defaults halves during that time, that would still leave a total rate of more than 10 percent—a troubling statistic for anyone who cares about not leaving students exposed to the credit risk and high charges that result from student loan default.

The concerns about the increases in cohort default rates certainly should be a topic of discussion among policymakers, but the metric also has real-life consequences for a number of schools. Next, I’ll take a look at just who should be worried about these results and who should be sending thank you cards to the lobbyists that forced changes in the sanction thresholds.