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By Paul Bradley  /  
2014 October 13 - 08:31 pm

Loan Default Rate Drops for Community Colleges

Rate Exceeds National Average, but Caution Urged in Interpreting New Data

The percentage of community college students defaulting on their student loans is on a downward path but still far exceeds the national average, according to data released by the U.S. Department of Education.

The three-year cohort default rate for community colleges was 20.6 percent for students who entered repayment in 2011, down from the 20.9 rate from a year before. By comparison, the overall default rate was 13.7 percent, down one percentage point from the year before.

But comparing default rates for community colleges must be undertaken with great caution, said J. Noah Brown, president and CEO of the American Association of Community College Trustees. Community college students borrow at far lower rates than students enrolled in other education sectors.

Overall, just 17 percent of community college students take out federal loans to finance their educations versus 56 percent of students in all other sectors of higher education. Community colleges serve 42 percent of all undergraduates in the nation.

As a result, defaults often reflect a very small percentage of a college’s student population and are a lagging indicator of students who entered repayment several years prior.

“Default rates are inherently limited, because they only look at the outcomes of borrowers entering repayment, and the vast majority of community college students don’t borrow,” Brown said. “We are still — by far — the most affordable sector of higher education.”

The percentage of students who borrow is even smaller at some individual community colleges. At Blue Mountain Community College in Pendelton, Ore., for example, the 2011 default rate was 28.1 percent. But only about 10 percent of students took out a student loan. The college had a 2011 enrollment of 4,325.

Schools with default rates of more than 30 percent for three years in a row or 40 percent or more in a single year can lose eligibility to participate in federal student aid programs. This year, one adult and continuing education school and 20 for-profit colleges were listed as subject to loss of eligibility. No community colleges were on the list.

But ACCT and other groups believe the cohort default rating system is in dire need to reform. In a report issued in July, ACCT and The Institute for College Access and Success issued several recommendations for improving federal policy and regulations.

Default rates have been increasing nationwide, and some community colleges have stopped offering federal loans out of fear of federal sanction.

“Student loans are vital to the academic persistence and success of many of our students who can’t afford the climbing cost of college out-of-pocket,” said Jee Hang Lee, vice president for public policy and external relations of ACCT. “Even though most of our students don’t borrow in any given year, more than a third of those who complete their associate degrees at community colleges need loans to get to graduation. But CDRs give our members great pause about their ability to continue offering critical access to loans without reform to the system. As the primary lender, the federal government needs to step in to help students with loan repayment.”

Among other things, ACCT has also called for replacing default rates with a metric known as the Student Default Risk Index, or SDRI, which would multiply the cohort default rate by the institution’s borrowing rate.

At colleges where borrowing is less common, often due to low tuition, this calculation would provide improved context to the average risk of default, rather than making faulty comparisons based only on a small subset of students, the ACCT said. Similarly, the group said that appeals and challenges under the Participation Rate Index should be permitted annually, rather than only at the point of sanction, to encourage colleges with low borrowing to remain the federal loan program.

The three-year rate decreased compared to last year’s rates for all sectors, decreasing from 13 percent to 12.9 percent for public institutions and from 8.2 percent to 7.2 percent for private non-profit institutions. The default rate decreased at for-profit institutions from 21.8 percent to 19.1 percent, though the sector still has the highest three-year rate.

Federal officials have taken several steps to help students man age their debt. Students who qualify can have their repayment plans based on their income. Next year, the department plans to implement a policy that would cap loan repayments at 10 percent of a borrower’s income.

The Education Department released the default rate data a day after it announced that it has “adjusted” the rates of some institutions by excluding some defaulters from the colleges’totals. Those borrowers had their loans assigned to more than one loan servicer. The department removed from its calculations borrowers who had defaulted on one loan but who had one or more loans in repayment.

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