FILE – In this Sept. 7, 2017, file photo, Education Secretary Betsy DeVos speaks at George Mason … [+]
In this moment where student loan debt is blamed for just about everything, here’s some good news: fewer education borrowers are defaulting on their loans.
Foremost, it underscores the most overlooked dimension of student borrowing – that it’s nearly always an outstanding decision to borrow money for school.
It’s better to not borrow, but if the choice is to take on debt and get the education or not take out the loan and not get your degree, take out the loan. The lifetime benefits of a college education, both financial and personal, far outweigh the cost of borrowing. That more students are able to borrow and earn enough to pay down their loans reinforces that value proposition.
Overall, according the Department of Education (ED), about one in ten student loan recipients (10.1%) who were eligible for repayments in 2015/16 entered into default by going more than 270 days without a payment. Last year, the three year default rate was 10.8%. This figure only counts direct government loans, not those made by private lenders or institutions. Nonetheless, it’s a good, consistent barometer for weighing how college loans are working out.
Another key point in the loan default data is also frequently overlooked in conversations and consternations about student loan debt – an obscene amount of overall debt and a disproportionate rate of default comes from for-profit colleges.
According to the new default numbers, 15.2% of all loan holders in the 2015/16 group who went to for-profit colleges defaulted on their loans within three years. At private, non-profit schools, the default rate was less than half that, just 6.6%. At the public schools, the default rate was 9.6%.
That’s bad. But in reality, it’s worse than that.
ED says that 985,335 students from for-profit colleges entered into repayment in the calculated period, meaning that, at 15.2%, 149,770 of those were in default. That means that nearly a third of all defaults (32.7%) were from students who went to for-profit colleges. That’s outrageous when you consider that for-profit students were just 22% of total borrowers. It’s scandalous when you consider that, as of 2017, for-profit colleges enrolled just 5% of all students.
In other words, for-profit schools serve just 5% of students but account for 22% of all student borrowing and about one-third of all loan defaults.
And if you’re inclined to think a 15% default rate does not sound too terrible overall, keep in mind that’s over just three years. A 2018 report by a private think tank found that more than half of all borrowers at for-profit colleges (52%) default on their loans within 12 years – half.
Moreover, the Department does have a rule cutting off access to federal student aid and loans if a particular school’s loan default rate is too high. Of the 15 schools singled out for potential sanctions due to high default rates this year, 13 were for-profits.
But not even those numbers tell the whole story. Loan default rates at for-profits may be even higher than reported because they have actively engaged in practices to sidestep defaults and trigger scrutiny and penalties.
At the same time, more and more for-profit schools are changing their tax status, sneaking into being “non-profit” schools by selling the school to a non-profit entity they own then hiring the for-profit company to run the school, diverting 80% or more of tuition money back to their former, for-profit owners. That practice is, over time, sure to distort and drive up the default rates among the schools counted as non-profits, making the for-profits look better by comparison.
One of the reasons that default rates among for-profits are so high is that so few of their students graduate and even when they do, the financial rewards related to the quality of education simply are not enough to pay back the loans. It’s almost certainly related too that, according to ED, two-thirds of all students at for-profit colleges “study” exclusively, entirely online, where costs are cheap and the quality is suspect or unproven.
It’s good news that default rates are down. But it’s bad news that federal regulators and lawmakers continue to let for-profits schools and their investors soak up student loans and grant funding when the return simply is not there. And remember, you’re probably paying for those defaults since the loans are direct from taxpayers. So, when the loans go bad not only do the borrows lose, you do too.
