Today, the Trump administration released the most recent “cohort default rate,” which measures the proportion of students who started repaying their federal loans three years ago and are already in default. The measure currently functions as one of the few accountability metrics for schools who participate in the federal student loan program: if default rates are too high at an institution, that school may lose access to Title IV financial aid. This year’s data tell us that 10.1 percent of students who entered repayment in 2016 are in default, an unacceptably high number of borrowers. This year’s numbers reflect a small reduction in default rate over last year’s—an improvement that was likely buoyed by the nation’s economic recovery and by ongoing manipulation by schools (see below)—but it still means that millions of borrowers are currently in default on their loans and face significant financial repercussions as a result. And, as in previous years, this default cohort is disproportionately comprised of students who attended for-profit colleges, which enroll only 9 percent of students, but were responsible for 33 percent of defaults.
Unfortunately, the situation will likely only get worse due to recent Trump administration policies. For example, the administration this month made it much more difficult for students to discharge their loans through a “borrower defense claim” if they have been defrauded or cheated by their school, simultaneously making it easier for schools to get away with predatory behavior by limiting the dollars that the Department may ask schools to pay back to cover those claims, and removing the ban on predispute arbitration, a process that prevents public exposure of bad behavior. Most students who bring borrower defense claims attended for-profit colleges, and the $11 billion in loan relief erased by the rule means that those borrowers will struggle to pay back those loans after being misled by their schools. The administration also rolled back protections provided by the gainful employment rule, which at the time was one of the other of a limited set of accountability mechanisms in place for institutions, cutting programs off from accessing Title IV financial aid if their graduates owed high levels of debt while earning low wages. Schools no longer constrained by these potential repercussions will be more likely to engage in the kind of predatory behavior that results in high debt burdens, poor quality credentials, and, for too many students, loan default.
Not only will harmful financial exposure for students increase, the numbers for this particular cohort will also likely get much worse over time. Research shows that looking at the three-year default rate does not capture the full scale of financial struggle experienced by borrowers. In fact, the Government Accountability Office recently released a report confirming that schools often hire outside consulting companies to help put borrowers in forbearance, staving off default until just outside the three-year window, just to make their numbers meet the baseline requirements and limiting the current effectiveness of the measurement as an accountability mechanism. Researchers looking beyond the three-year window have found that the six-year cohort default rate was about 50 percent higher than the three-year rate, and analysis released by Brookings projects that the long-term, twenty-year default rate for cohorts entering repayment in the early 2000s could hit as high as 40 percent.
Researchers looking beyond the three-year window have found that the six-year cohort default rate was about 50 percent higher than the three-year rate.
And, beneath the top line numbers, there’s likely more troubling data that we do not yet have access to. There are deep racial disparities in the amount students must borrow, in repayment struggles, and in loan defaults: in fact, over a twelve-year period, almost half of black borrowers default on their loans. But the current release does not provide demographic data, and in fact the Department of Education collects limited information broken down by race and ethnicity.
In the past week, Senator Lamar Alexander (R-TN), the chairman of the Senate’s Health, Education, Labor, and Pensions Committee, proposed pursuing a small package of higher education bills, presumably in lieu of a full—and long overdue—rethink of the federal government’s main higher education law, the Higher Education Act. The crisis in student loan defaults, along with the destructive deregulatory actions of the Trump administration, make it clear that such a piecemeal approach is unacceptably meager. Congress should instead override recent Trump administration actions and pursue a comprehensive reauthorization of the Higher Education Act—one that provides meaningful consumer protections from predatory actors, relief for struggling borrowers, and that, at the very least, takes initial steps to move the country back toward a publicly financed, debt-free higher education system.