Community college officials have long decried the use of cohort default rates (CDR) as a criterion for institutional student aid eligibility. This starts with the basic conviction that the CDR is a poor measure of a college’s quality.
First, at most community colleges borrowers represent only a small fraction of a student’s population (and thankfully so). Second, colleges do not determine who receives federal loans; they can only advise students about the merit of taking out loans, and not prevent them from doing so if they qualify for the loans. Finally, federally-contracted loan servicers, not colleges, are the loan’s primary administrative agents, and should bear the weight of defaults.
That said, defaults are no trivial matter. Students in default may have wrecked credit, can no longer access financial aid and may have wages garnished. For colleges, a CDR over 40 percent in a single year or 30 percent or higher for three consecutive years results in the loss of aid eligibility. The current sector-wide community college CDR of 18.3 percent is disturbing, and the actual, lifetime rate is much higher, since the CDR only measures loans for two to three years after entering repayment .
Fortunately, very few community colleges ever face losing their Title IV eligibility from high CDRs. But this looming threat combined with the colleges’ inability to limit student borrowing has caused some institutions to eschew participation in the loan programs altogether.
Colleges do play an important role in administering federal loans, so they are not entirely passive entities in this area. Perhaps even more importantly, there remains a strong correlation between non-completion and default.
Looking at a different rate
In recognition of the limitations of the CDR, policymakers from both sides of the aisle have increasingly focused on using an alternative accountability metric: the loan repayment rate.
Generally, a loan is in repayment if a borrower has reduced the loan principal by $1 over a given period of time; three years is a standard used by the U.S. Department of Education for its College Scorecard. This means that loans that are in forbearance or income-based repayment where interest is accruing do not count as being in repayment (which is not the case when calculating cohort default rate), even if the loan is not in default. But one of the putative attractions of this approach is that it prevents the use of forbearance as a means to avoid defaulting, at least in the short term.
There is no commonly accepted loan repayment rate definition. It may be dollar-based or borrower-based; it may have a three-or-more-year window. It may apply to the entire institution or to individual programs. In essence, it is designed to determine whether students are actively retiring their debts.
The College Scorecard has an institutional-based repayment rate whereas an earlier version of the federal gainful employment regulation proposed, but later withdrew, a programmatic-based repayment measure.
An important take on the repayment rate comes from the House proposed Higher Education Act (HEA) reauthorization legislation, commonly known as the PROSPER Act (HR 4508). It proposes that successful repayment means that a borrower is not in any of a number of statuses: not in default, not in certain classes of deferment and not more than 90 days delinquent at the end of the third fiscal year in repayment. For example, borrowers who are in-school deferment or military service at the time of measurement count as being in repayment. The PROSPER Act also sets a loan repayment rate standard by program – a Title IV program would lose its eligibility if it had repayment rate of less than 45 percent for three consecutive years.
Much to consider
The recent Center for American Progress’ report on loan repayment rates provides a helpful analysis of issues related to loan repayment rates. Given that repayment rates could soon replace default rates as a primary accountability metric, community college leaders may well want to become familiar with some of the issues raised by this new yardstick.
In the meantime, the American Association of Community Colleges will continue its work on ensuring that any new metrics reflect the unique nature of community colleges and their students. CDRs may be far less than ideal, but at least they’re the enemy we know.