Late Friday afternoon, the U.S. Department of Education released new data on student loan repayment rates by individual institution. The numbers aren’t good news for anyone, particularly for the for-profit sector.
Unlike default rates, a blunt measure that only counts borrowers who don’t make loan payments for 270 days, these repayment rates are a much more sensitive measure of whether students are facing hardship in repaying their loans. Borrowers can avoid being in the default measure by entering deferment, forbearance, or income-based repayment, even if they’re not making meaningful progress on paying down their debt.
Not so with the new measure. The repayment rates are based on the number of students who are actually paying down the principal on their loans. Even if a borrower is making regular payments, if those payments only cover interest then it doesn’t count in the repayment rate.
I’m sure that institutions will contest some of the decisions the Department made in calculating these numbers – not giving credit for consolidated loans or income-based repayment, for example. But regardless of what the final calculation ends up being, this is an important number to know. It shows the percent of students actually repaying their loan debt – and it’s a little frightening.
The for-profit numbers are bad – only 36 percent of loans are in repayment according to calculations by the Institute for College Access and Success. But the repayment rate doesn’t get much better at private, not-for-profit or public institutions. Only 56 percent of students at public institutions and 54 percent at private, not-for-profit institutions are counted as being in repayment. That means that close to half of students are not paying down the balance of their student loans.
For these students, their education gets more and more expensive as interest accrues over time and they will spend a longer portion of their adult life making loan payments – possibly instead of saving for retirement, buying a house, or taking vacations. Increasing the number of Americans with a degree is supposed to act as an economic engine – more people with degrees means they get better paying jobs and more money flows into our economy. But if a substantial portion are diverting their additional earnings to loan payments for upwards of 20 years, it’s going to take a long time to see the economic benefit of all that education.
Click Image To Enlarge
5/29/2012 | The New York Times discusses Mary Nguyen's report "Degreeless in Debt: What Happens to Borrowers Who Drop Out."
5/28/2012 | The Washington Post discusses Mary Nguyen's analysis of college dropouts and loan defaults from her Chart You Can Trust, "Degreeless in Debt: What Happens to Borrowers Who Drop Out." 
5/24/2012 | Education Week discusses Anne Hyslop's views on Mitt Romney's education plan.
{ 1 comment }
“Unlike default rates, a blunt measure that only counts borrowers who don’t make loan payments for 270 days . . . ”
Loans must be delinquent for more than 360 DAYS before they are considered defaulted for purposes of default rates. http://www.ifap.ed.gov/DefaultManagement/guide/attachments/Chapter2pnt1HowRatesareCalculated.pdf .
This is one reason why it is so difficult to default within the 2-year cohort default rate. In most cases, for the few months where the majority of borrowers tend to enter repayment, you would have to not make any payments at all and default very very “smoothly” to end up in the numerator.
Long-term default rates are blunt because they exclude rehabilitations, which cure up to one-third of defaults. This doesn’t impact the two-year default rates very much, but four-year, 10-year, 15-year, and so on are skewed way-high due to exclusion of rehabilitations. Default rates are also skewed high because, besides rehabilitations, they exclude other types of post-default repayment, such as wage garnishments, Treasury offsets and cash payments from the borrower. Default rates are a very narrow tool that must be used in conjunction with other tools to measure payment success and collections success, such as interest rates, discount rates, collectibility, etc.
“not giving credit for consolidated loans or income-based repayment”
“Borrowers in income-based repayment would be treated as successfully repaying their loans if their incomes are high enough to allow them to pay more than the interest on their loans.” Most IBR loans will be OK. ICR is designed to be more conducive to negative amortization than IBR, although capitalization is limited to only 10% of the original debt.
Payments on consolidation loans are counted once the consolidation loan is paid off: “the LPF would not include any loans paid through a
consolidation loan until the consolidation loan is paid in full.”
Consolidating simply transfers the debt to a different place and is a personal, financial management choice/decision of the borrower but does not automatically prove competent repayment — as several of the publicly-traded for-profit conglomerates have been falsely arguing. It would be extremely bogus to build in an assumption that they were repaying at 100% as Strayer and others were presuming.
“their education gets more and more expensive as interest accrues over time”
This is an outdated, flawed argument from the 1980s that simply scares debt-averse ethnic groups from pursuing a postsecondary education at all.
Interest paid over time is far less than it nominally appears in simplistic “repayment calculators,” because of the time value of money. A borrower should always choose a 20-year repay plan or 30-year repay plan rather than defaulting. If finances improve, the borrower can then always switch plans again later or prepay on the side. Government agencies such as DoEd as well as guaranty agencies should change their repayment calculators to build in the net present value parameter, as Schrag and others have done.
Comments on this entry are closed.
{ 1 trackback }