Now Is the Time To Fix Cohort Default Rates

A college student studies in Irvine, California, October 2020.

In late September, the U.S. Department of Education reported its annual data on the number of colleges at risk of losing access to federal financial aid because too many former students defaulted on their federal loans. Just as in each of the past few years, these results were far from newsworthy. Only about a dozen colleges face the potential loss of aid, including some institutions that were in the same position last year but have thus far avoided sanctions due to the litany of appeal options available.

Congress and policymakers have a rare opportunity to end this ineffective cohort default rate regime. At the very least, the default rate measure must be reformed to close loopholes that allow many colleges to avoid sanctions. Ideally, this improved default rate would be supplemented with a second measure of borrower payment success that captures additional types of loan struggles, such as delinquency or an inability to make payments.

Admittedly, it may seem counterintuitive, if not mean-spirited, to call for increased accountability in the midst of a global pandemic that is hurting colleges and forcing more students to leave before graduation—a strong predictor of default. However, the current situation is in fact the perfect time to improve the system, exactly because it provides enough time to phase in something better.

The recession and default rates

The truth is that the cohort default rate is going to be irrelevant for the next several years. The vast majority of federal student loan borrowers have had their payments paused since March, which means that they cannot default during this time. Even once the pause ends, it is likely that the U.S. Department of Education will attribute high default rates to the pandemic or its aftermath rather than hold colleges accountable. And since colleges need three consecutive years of high default rates to lose access to all aid, it will be years before all but the colleges with the absolute highest default rates face any accountability as a result of this measure.*

It is also the case that any replacement measure would be phased in over time. For example, the 2008 reauthorization of the Higher Education Act extended the default rate measurement window from two years to three. But the first college wasn’t at risk of losing aid because of this change until six years later. The lag time to implement a new accountability measure, coupled with the temporary irrelevance of the cohort default rates, makes this the perfect opportunity to craft an improved set of outcome measures. There’s no net reduction in accountability and no risk of harm to colleges.

An economic downturn also presents a chance to pressure-test new measures. Creating and tracking a new measure now would make it possible to see just how much it is affected by a recession and eventual recovery.

What policymakers should do

In order to fix the default rate problem, policymakers must first add in provisions that close worrisome loopholes, such as those that allow colleges to escape responsibility for negative outcomes if they put borrowers on extended payment pauses that keep them out of default until the measurement window closes—but do not set them up for any long-term success. Borrowers who pause their payments too long for reasons besides going back to school, joining the military, or other types of public service could be treated as if they were defaulters. If this loophole were removed, institutions would be encouraged to try to improve their default rates by getting borrowers into income-driven repayment—a better outcome for borrowers because it would at least hopefully move them toward eventual loan forgiveness.

Ideally, policymakers would go further than simply fixing the cohort default rate. They should also supplement it with a repayment rate—a measure that looks at whether borrowers are making required payments. Repayment rates test not only if borrowers avoid default but also if they are actually following their payment plan and staying current. The advantage of such a measure is that it would identify someone who is on an extended payment pause as still experiencing a negative outcome, assuming that pause is not for reasons such as military service or going back to school. Moreover, this approach would consider a $0 payment on a plan that ties payments to income as successfully making payments because the borrower is doing what is asked of them.

Congress has previously expressed interest in outcome measures that look at these types of repayment behaviors. Most recently, the College Affordability Act proposed an on-time repayment rate that judged colleges based on whether their borrowers made at least 90 percent of required payments during their first three years in repayment. Before that, the Promoting Real Opportunity, Success, and Prosperity (PROSPER) Act proposed to judge college programs based on the share of their borrowers in a positive repayment status—defined as being paid off, being less than 90 days late, or using an approved payment pause such as going back to school.

Conclusion

Colleges will have little reason to fear default rates for the foreseeable future, which is understandable given the much-needed payment pause afforded to most borrowers during the pandemic. But when that ends, tens of millions of borrowers will be headed back into repayment, where they will face the possibility of default and all the consequences that come with it. Furthermore, current and future students will keep on taking out loans during this time, including by borrowing to attend colleges that would face sanctions if the default rate did not have so many loopholes attached to it. Policymakers owe it to future students to seize this opportunity to put in place a better system that protects them.

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

*Author’s note: Colleges with a default rate of more than 40 percent in a single year only risk losing access to federal loans.