Let me also recommend Erin Dillon and Robin Smiles’ new report on how a group of HBCUs successfully and dramatically reduced student loan default rates. There’s an important lesson here about incentives and public accountability.
The story begins in 1990, when the federal government cracked down on thousands of fly-by-night colleges that were defrauding the government by signing up students for bogus loans. The national loan default rate peaked at 22.4 percent that year, costing taxpayers billions. Congress responded by banning any college where more than 25 percent of borrowers defaulted for three consecutive years from the program. The law was a spectacular success–over 1,000 colleges were kicked out and the national default rate dropped to the mid-single digits.
Most legitimate colleges were unaffected by the 25 percent standard. But a few–primarily those that served low-income and first-generation students–end up under the gun. Unsurprisingly, given their historical mission, this group included a number of HBCUs. Initially, HBCUs were exempted from the 25 percent rule. But when the federal Higher Education Act was reauthorized in 1998, the exemption was lifted. Because so many of their students relied on federal grants and loan, this was akin to the death penalty. A number of the threatened HBCUs were in Texas. They banded together to share resources and strategies. And it worked! The chart below tells the tale.
The two lines on the chart show historical default rates for the Texas HBCUs and another group of HBCUs that also had high default rates but weren’t part of the coalition. Because it takes two years to calculate a two-year default rate, the three most recent default rates in 1998 were for the 1994, 1995, and 1996 cohorts. As the chart shows, default rates for these institutions averaged over 30 percent in those years, and had been at similar levels for some time.
Then the law changed, effectively creating a federal accountability system for student loan default rates. Suddenly, the colleges had strong incentives to improve that hadn’t existed before. And in response, default rates immediately began to decline, with rates for the Texas consortium declining the fastest. Rates held steady between 10 and 15 percent before starting to creep up again a decade later — perhaps, as the report notes, because the initial focus had worn off and the accountability system was based on only a single measure: above or below 25 percent.
In short, colleges respond to incentives. Higher education accountability works. If Congress hadn’t exempted HBCUs in 1990, it would have worked earlier. Gentle suggestions that autonomous institutions make difficult changes tend not to be very effective. Nor is it enough to simply report information. The default rates in question had been public knowledge for years. It wasn’t until Congress actually attached consequences to the numbers that the colleges sat up and took notice.
And once they took notice, they did all kinds of smart things. College leaders sent a clear message that default aversion was a campus-wide priority. Admissions, student affairs, financial aid, academic affairs, and alumni affairs officers worked together in (relative) harmony. The colleges began paying much more attention to their students, watching them for warning signs of dropping out (a major risk factor for default) and staying in close contact after graduation. Financial aid policies were altered to reduce excess borrowing. New student tracking systems were built. Colleges pooled resources to hire outside help that none could have afforded to pay for on their own.
What they didn’t do was stop enrolling students who needed student loans. Strong public accountability is somewhat of an alien concept to higher education, and opponents are always quick to play the “unintended consequences” card, e.g. “If you try to raise graduation rates colleges will just lower academic standards.” I’m always amazed at how colleges are so quick to argue from their own lack of academic integrity (“Don’t push me or I’ll start churning out worthless degrees!”) but in any event the case of the Texas HBCUs suggests otherwise. Colleges respond to incentives just like any other organization. The challenge is to have more, stronger incentives that are aligned with the best interests of students and the public at large.
The report also serves as an important counter-weight to the narrative being peddled by the Career College Association, which has strongly opposed new federal provisions that tighten default rates standards on the nonsensical (and again, weirdly self-nullifying) grounds that colleges have no impact whatsoever on whether or not their students graduate and earn enough money to pay back their loans. Asked to comment on our report, CCA president Harris Miller said that while the CCA “did not have time to review the Education Sector report’s methodology to decide “whether we agree with the conclusions about how much default variance is explained by external factors (e.g., nature of student population, state of economy) as compared to factors over which an institution has more control.” Miller’s “initial reaction,” he said “is that the analysis underplays the significance of the student risk factors of students who attend community colleges, minority serving institutions, and career colleges.
This is a key lesson for those of you interested in pursuing careers as well-paid lobbyists for corporate trade associations–it’s crucial that you be able to say, on the record and with a straight face, “I have not read the report but nonetheless disagree with its findings.”