The Value of an On-Time Repayment Rate

People and students mill about on a New York City college campus, April 2017.

In 1992, Congress created the cohort default rate, the first measure to judge colleges on student loan outcomes and put federal aid access at risk for poor performance. It did so to bring down a national default rate that approached 25 percent and to take aid away from schools that saw too many borrowers end up in default. Nearly 30 years later, the cohort default rate is still the only statutorily defined measure of student loan outcomes tied to federal aid access.

This would change under the College Affordability Act, an expansive proposal to reauthorize the Higher Education Act. Introduced in the House last week by House Committee on Education and Labor Chairman Bobby Scott (D-VA), the College Affordability Act would create a second measure of student loan outcomes—an on-time repayment rate. This new metric recognizes the need for additional ways of thinking about what constitutes success with student loans today.

The on-time repayment rate contains another benefit as well. Many policymakers want to adopt a repayment rate to judge colleges. The on-time approach captures the same goals of those pushes, while sidestepping complex computational and policy issues that could undermine those other proposals.

Here’s what everyone needs to know about the on-time repayment rate.

Why should colleges be judged on repayment rates?

Many proponents of repayment rates advocate for them to fix the main shortcoming of the cohort default rate: that a borrower can use discretionary forbearances long enough to avoid being captured in a default rate. Discretionary forbearances are those that are granted by student loan servicers simply because the borrower asks for them. Institutions that put many borrowers into long-term forbearances can evade accountability problems stemming from high default rates, but many of these borrowers appear to default after the federal government stops tracking colleges’ outcomes. Repayment rates solve this problem because a borrower who uses long-term discretionary forbearances is not repaying their loan and is thus not a successful outcome for a school.

But default rate loopholes can be closed without a repayment rate. The College Affordability Act, for example, treats long-term usage of discretionary forbearance as akin to defaulting. Yet a repayment rate still matters because it sets a more positive goal aimed at whether borrowers are taking steps that hopefully will result in the eventual retirement of their loans. It goes beyond just looking for the worst possible outcome—default.

What is the on-time repayment rate?

The on-time repayment rate tracks what percentage of a school’s borrowers have made at least 90 percent of their required payments by the end of the federal fiscal year in which they hit their 36th month in repayment. This works out to those borrowers who have missed no more than three payments in 36 months.

The measure broadly defines what payments count toward the 90 percent target. It counts all payments on approved repayment plans, including any payments made on an income-driven repayment (IDR) plan—even months when a borrower’s payment is $0 because their incomes are so low that they are not required to make a payment. It also includes months that borrowers spend in deferment for things such as going back to school or forbearances for medical residencies, military service, the pursuit of teacher loan forgiveness, or similar circumstances. Loans that have already been paid off also count as successes.

What doesn’t count: payments that are more than 30 days late or never made at all; time spent on deferments for reasons such as economic hardship or unemployment; and discretionary forbearances. The on-time repayment rate does not count these statuses as payments because they are signs that a borrower is struggling—which, if they occur frequently, could be attributed to how well their college served them.

How does an on-time repayment rate compare with other repayment rate proposals?

The only repayment rate currently in operation is on the College Scorecard. But there are other proposals for how to define this type of measure. The on-time repayment measure is quite different from most of these other approaches, which typically focus on whether borrowers’ balances are declining. For example, the repayment rate used on the College Scorecard tracks the share of borrowers who have not defaulted and have reduced the original principal balance of their loans by at least $1 since they entered repayment. This column refers to measures such as this as “paydown tests.”

Interestingly, the on-time repayment rate is most similar to the definition proposed by Rep. Virginia Foxx (R-NC), the former chairwoman of the House Committee on Education and the Workforce, in the 2017 PROSPER Act. Her repayment rate focused on a borrower’s loan status at the end of the third year in repayment. Borrowers were counted as successes if their loan was paid off or closed, if their loan was current or fewer than 90 days late, or if they had paused payments for reasons including going back to school or serving in the military. This column calls this measure a “status-based” rate.

The key shared element of the status-based rate and the on-time repayment rate is that both operate under the idea that repayment should be agnostic to a borrower’s repayment plan or the share of their balance left.

Why is an on-time repayment rate better from a policy standpoint?

The on-time repayment rate is a better approach than paydown tests because it limits the possibilities of inaccurately labeling borrowers as failures.

There are ultimately two problems with paydown tests that could result in this label. One is that a borrower making all required payments on an allowable IDR plan could still count against a school’s performance. According to Center for American Progress calculations from the Department of Education’s repayment estimator, a borrower with a tax filing status of single who makes $20,000 per year and owes $30,000 at a 5 percent interest rate could pay as little as $11 on an income-based repayment plan. They will not go delinquent if they pay that amount, but they will also not cover all of the interest accruing each month, meaning that their balance will grow, and they will fail a paydown test. Saying that this borrower is not successful for the school may be a fair outcome in the sense that a borrower owes too much compared with what they earn. But it is also hard to penalize an institution when a borrower is doing all that is asked of them on an allowable repayment plan.

This situation can pit the interests of schools against what borrowers need in terms of affordable payments. A borrower may need IDR to balance their loan payments against other expenses, but a college could want to counsel them into other plans so that they can avoid accumulating additional interest. This is also challenging because IDR is a long-term payment management solution. Ideally, payments should grow as income does, meaning that more debt gets paid off further into repayment.

The second issue with a paydown test is that borrowers who accumulate debt at multiple institutions may end up reflecting negatively on a school that did not award much debt to them. Consider a borrower who graduated from a community college with $10,000 in loans. They go on take out $20,000 at a four-year institution and $30,000 for graduate school. If the borrower only had $10,000 in loans, they may have used a plan that retires their debt in equal installments over 10 years. Instead, they can only afford the $60,000 balance by using an IDR plan that doesn’t cover their interest. Their balance then grows, causing it to appear as if the community college produced a poor repayment outcome, even though the borrower had debt low enough from that school that they may have been able to successfully pay it down if they had not borrowed elsewhere.

Neither situation creates problems under the on-time rate, which counts on-time payments as successes regardless of whether they are sufficient to cover interest and counts a borrower’s time spent reenrolled in school toward the 90 percent threshold.

What does the on-time repayment rate miss?

The likely policy objection to an on-time repayment rate is that it will pass institutions even if they force borrowers into too much debt. That’s because it provides no consequences for institutions with many borrowers who don’t have incomes high enough to pay down all their interest on an IDR plan.

There’s a legitimate policy rationale for being worried about institutions charging students too much and using IDR as a safety valve. Significant usage of IDR can pass the costs of excessive debt on to students in the form of larger interest accumulation—or onto taxpayers in the form of forgiveness, even though the school is at fault.

But concerns about IDR usage are best addressed by a measure that directly gets at that worry. That would mean creating a separate accountability measure to judge schools either on IDR usage, the amount of debt compared with the earnings of borrowers, or some other measure. Trying to fix this problem through a repayment rate risks too many unintended consequences.

Because the on-time repayment rate has a more expansive definition of what constitutes successful loan outcomes, it is important to set an ambitious target for what share of borrowers from a school must make 90 percent of their payments or else face penalties. Unfortunately, there are currently no data publicly available to model this target. As a result, the bill tasks the U.S. Department of Education with the job of determining what share of a college’s borrowers must be successful. This creates uncertainty, as the ultimate impact of the measure is not known right now.

Finally, policymakers may also have objections due to complexity. One is on the grounds that tracking individual payments is more complex than just measuring a borrower’s status at the end of the federal fiscal year—an approach used in the paydown test and proposed status-based measure. The other is that the College Affordability Act ties sanctions from poor on-time repayment rates to meeting other conditions related to spending on instruction, which can make the full set of requirements around the measure harder to follow.

Conclusion

Relying only on default rates to track student loan outcomes is like structuring highway safety policy to consider just fatal accidents. It’s true that default is the worst outcome for borrowers because it can lead to seized tax refunds, garnished wages, and ruined credit. And that outcome should be tracked. But it ignores all the other crashes and problems that get in the way of a safe journey. To that end, adopting an on-time repayment rate is an important additive measure that would judge colleges on the goal they should have for every borrower—that they are taking the steps necessary to no longer have debt one day.

Ben Miller is the vice president for Postsecondary Education at the Center for American Progress.