For-profit colleges not to blame
January 18th, 2018
On January 11th, the Brookings Institution issued a report finding that the default rate for undergraduate, federal student loan borrowers nationwide will be about 38% by 2023, indicating a true, lifetime default rate of about 40% This is far, far higher than any lifetime default rate publicly acknowledged for federal student loan borrowers previously.
The study estimates that the lifetime default rate for the for-profit borrowers to be about 70%. While this is certainly an astonishingly high default rate, it is wrong-headed to assume that the default crisis is attributable to these colleges.
Consider: In 2003-2004, the percentage of borrowers who were attending for-profit colleges and had federal loans was only 18%, according to the National Center for Education Statistics (1). Assuming that the 70% default rate found in the Brookings study is correct, this directly reveals that for-profit defaults could only have contributed 12.6% of the 40% lifetime default rate.
This indicates that the lifetime default rate for the non-profit colleges is about 27.4%- well over a quarter of all borrowers!
Clearly, the non-profit colleges can no longer “scapegoat” the for-profit sector, and blame them for the default crisis this nation now faces. It is time for the non-profit colleges to own up to the fact that their students are defaulting at an astonishing rate.
What is more disturbing: In the 2003-2004 school year, the average undergraduate borrower left school with about $10,700 in federal student loans (2). Today, that has increased to about $39,000- greatly outpacing inflation (3). During the same time period, earnings have flat-lined.
For more recent students, the true, lifetime default rate is certainly far higher than the 40% found by this study. Recent WSJ reports show that 400,000 defaults were added to the roles in 2015, and that this increased to 1.1 million defaults added in 2016. This acceleration of defaults, combined with the borrowing and earnings trends since 2003 would indicate that the lifetime default rate for more recent students is surely greater than 50%, probably far greater.
What is most disturbing: Years of White House Budget data confirms that the Department of Education has been making a profit, not a loss, on defaulted federal student loans. Figure 1 (below) shows the recovery rate for federal student loans vs. all other government made or insured loans for 2010- the median year between 2004 and today. Only defaulted student loans are returning more than the government pays out on default claims, and even allowing for generous collection costs, this still remains true.
We have been warning the public and policy makers for many years about the likely true default rate, and the unconscionable profit making on these loans. This has been enabled by the unprecedented, and unwarranted removal of bedrock consumer protections like bankruptcy rights, and statutes of limitations. Bankruptcy rights are called for in the Constitution ahead of the power to declare war and raise an army (4). The removal of these from student loans- and the consequences that we now are witnessing- clearly prove the wisdom of the Founders.
If this lending system is to be fixed, bankruptcy rights must be restored, at a minimum. We urge Congress to immediately pass the bipartisan bill, HR. 2366, to prevent the entire lending system from vanishing into a mist of popular illegitimacy, and to avoid social and economic harms that will likely result.
Contact: Alan Collinge
[email protected]
(202) 594-1120
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National Center for Education Statistics, Trends in undergraduate borrowing II, Analysis Report, February 2008 (page 21)
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Ibid.
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Extrapolated from The Institute for College Access and Success data from Peterson’s, Inc (A Nelnet Company): https://ticas.org/posd/state-state-data-2015
- Article I, Section 8, U.S. Constitution
