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New Federal Data Show Rising Student Loan Default Rates

The federal government’s new system to calculate student loan default rates – while highlighting the problems of many for-profit colleges – also may pose risks for some minority-serving institutions (MSIs) that are seeing their rates increase as well.

The 2008 renewal of the Higher Education Act changed the way the government measures defaults by calculating the number of students who fail to repay loans in the first three years of repayment period. Prior to that law, the rates were based solely on those who default during the first two years of repayment.

While supporters say the new system provides a better snapshot of the default problem, new U.S. Education Department data show dramatic increases in default rates for many schools. Colleges will not face sanctions under the new system until 2014, but the latest data – listing the default rates of individual colleges under both systems – are drawing attention.

“Congress will need to look at this issue. The numbers are much different than people expected,” said Victor Sanchez, vice president of the United States Student Association (USSA).

At first glance, the data show the seriousness of the problem at for-profit colleges. As a sector, proprietary schools had a 25 percent default rate under the new system for students who began repaying their loans in 2008. With just a two-year snapshot, the sector’s default rate was lower at 11.6 percent.

Rates at public and private, non-profit colleges also are higher under the new system. Among all public colleges, three-year default rates were 10.8 percent compared with 6 percent under the two-year review. Private non-profits also saw their average rates rise from 4 percent to 7.6 percent.

Individual colleges eventually will face sanctions for three-year default rates of 30 percent or more, and data for the new system show some MSIs could be at risk.

At Shaw University in Raleigh, N.C., the two-year default rate is 17.1 percent, safely below the 25 percent threshold that currently triggers sanctions. Under the new system, according to the department, Shaw’s default rate is 30.2 percent, which in future years could leave it open to penalties.

Livingstone College, a private HBCU in Salisbury, N.C., has similar data. The college’s default rate under the current two-year system is 22 percent, while the three-year rate is in the potential danger zone at 33 percent. Denmark Technical College, a two-year Black college in South Carolina, has a 13 percent default rate under the current system but a 30.5 percent rate under the new system.

Some Hispanic-serving institutions (HSIs) also are potentially at risk. Cochise College in Arizona has a 30.4 percent rate under the new system, according to the Education Department. Under the current official calculation formula, the college’s 19.6 percent rate is safe from sanctions.

West Hills Community College, a California HSI, has its rate jump from 25.9 percent to 41 percent when looking at the three-year period.

“You definitely capture more defaults that way [with the new system],” said Barbara Grob, spokeswoman for the Project on Student Debt. The California-based group notes that the latest data highlight the problems at for-profits. While accounting for just 12 percent of higher education enrollment, this sector produced 48 percent of the defaults under the new system.

Yet USSA’s Sanchez says the data signals the need for greater federal and state investments in public higher education and minority-serving institutions. These institutions “will devote more attention to the needs of at-risk students,” Sanchez said.

The latest data also show the need for much greater public attention to the new default formula and the risks of taking out too many loans. “It has to usher in a new way of educating people about what their options are,” he added.

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