Early last year, my colleague Robin Smiles and I published a report called Lowering Student Loan Default Rates. The report looked at the steps a consortium of six historically black colleges in Texas took a decade ago to reduce their student loan default rates. In the wake of the new three-year cohort default rates released by the Department of Education last week, it may be time for these, and many other, institutions to revisit the steps this group of small, private colleges took to successfully lower their default rates.
Overall, the default rate on student loans jumped from 7 percent under the two-year calculation to 13.8% under the three-year calculation – nearly double. And it’s not just for-profit colleges that may be in trouble. While colleges won’t be held accountable for the new, three-year cohort default rates until 2014, many will need to start reducing default rates now to avoid sanctions in 2014.
Among public, 4-year colleges, two institutions had FY 2008 default rates above 30% (institutions with three consecutive years of default rates above 30% will risk losing federal financial aid). Another 38 had default rates above 20 percent. And among private, not-for-profit 4-year institutions, 17 had default rates above 30% and another 48 were above 20%.*
Many of these institutions are HBCUs. The average three-year default rate among HBCU’s was 20.2% in 2008, up from 18.5% in 2007. This, of course, masks wide variation – from a low of 4.76% at Morehouse School of Medicine to a high of 55.77% at Clinton Junior College, a private, two-year institution in South Carolina.
But 18% of HBCU’s have FY2008 three-year default rates above 30 percent, putting them at high risk of sanctions. Over half are above 20 percent. It’s true that HBCU’s serve a student population that is, on the whole, at a higher risk of not graduating and defaulting on student loans. But demographics don’t tell the whole story, and certainly don’t destine a college to having one out of three students default on their loans. What institutions do matters, too. A lot.
This is perhaps the most important lesson learned from the six HBCU’s that Robin and I profile in our report. When faced with losing federal financial aid because of high default rates, these colleges banded together and formed the Texas HBCU Default Management Consortium. As the chart below shows, the Consortium was successful in dramatically reducing default rates among the member schools. What these institutions did made a real difference.
For the many colleges–non-profit, public, for-profit, four-year and two-year–that are worried about the new three-year default rate, it’s time to revisit the past and remember the difference institutions can make.
*I’m only looking at institutions with 30 or more borrowers in FY2008