The Department of Education has released the latest round of cohort default rates for federal student loans, and there is good news and bad news. The good news is that the three-year cohort default rate—the share of student borrowers in default three years after entering repayment—ticked down a notch in 2013 from 11.8 percent to 11.3 percent. The bad news is that in attempting to ameliorate the problem, the Department may be ignoring a large part of it.
The Department of Education tends to blame for-profit colleges for high default rates, and has consequently targeted this sector with heavy regulation. There is some justification for this. In doing so, however, the Department has largely ignored the default crisis at public colleges, which account for more than half of the problem.
Of the 593,000 borrowers entering default in the most recent cohort, roughly 52 percent of them attended public colleges. Slightly more than a third attended for-profit colleges. Yet this one-third has been the primary target of the lion’s share of political rhetoric and rulemaking by the Obama Administration.
Certainly, for-profit colleges deserve closer scrutiny, particularly where taxpayer dollars are concerned. For-profits have a default rate of 15 percent, which is higher than the overall public sector rate of 11.3 percent. But this rate lumps in flagship public universities with community colleges. Among two-year institutions only, public schools fare worse, with a default rate of 18.5 percent, compared to 16.9 percent in the for-profit sector.
Why do default rates matter? Whether a student is able to pay back his loans tells us something about the sort of education a school provides—and whether that education is even likely to be completed. One of the strongest predictors of whether a student will default is whether he manages to graduate. While most students are better off with a college degree and student debt than they are with no degree and no debt, the worst of both worlds is no degree but a debt bill. Even dropouts who owe very little may find it difficult to pay back their loans.
Default rates also tell us something about whether it is too risky for taxpayers to take a chance on sending a student to a particular school—but on this score they are not a perfect measure. Indeed, they may understate the risk to taxpayers, as borrowers can use options such as deferment or forbearance to delay making payments on their student loans. In addition, borrowers are taking advantage of income-driven repayment plans in greater numbers, which will allow many to receive loan forgiveness later on.
If the Department of Education is serious about protecting taxpayers and helping students avoid poor-quality schools, it must scrutinize the public sector as well as the for-profit sector. According to the data release, 21 public colleges had default rates above 30 percent in 2013. Not a single one of them lost access to federal student aid.
The message is clear: as a college, who your owners are matters more than whether your students succeed. With default rates still in double digits, perhaps it is time to revisit that assumption.
Preston Cooper is a policy analyst at the Manhattan Institute. You can follow him on Twitter here.
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