Part II: Mark Kantrowitz Supplies Data on Cohort Default Rates

Little over a week after he sent out emails to people telling them about the upcoming cohort default rates being released, Mark Kantrowitz of fastweb has released them. I am a little late in getting these up, since I was out of the office when he sent them out. Here's the email message:

The US Department of Education published preliminary 3-year cohort default rates (CDRs) for FY2007, FY2006 and FY2005 this morning at the Federal Student Aid Site.

My analysis of these default rates can be found at
Cohort Default Rates.

Some of the highlights include:

3-year CDRs in FY2007 are 64% higher than 2-year CDRs
at public colleges, 71% higher at private colleges and
93% higher at proprietary colleges. These figures
correspond to absolute increases of 3.8%, 2.7% and 10.2%,
respectively. The percentage increases are lower but the
absolute increases are higher than in FY2006 and FY2005,
presumably due to the economy.

14 public colleges (3.1%), 15 private colleges (1.5%)
and 185 proprietary colleges (13.5%) have preliminary
3-year cohort default rates that are above the 30%
threshold, a total of 214 colleges. (This data is
restricted to colleges with more than 30 students
entering repayment.)

Proprietary colleges above the 30% threshold tend to be
smaller colleges. Most of the publicly-traded for-profit
colleges have 3-year CDRs below the threshold.

One public college (0.1%), 2 private colleges (0.1%) and
37 proprietary colleges (2.8%) have preliminary 3-year
cohort default rates that are above the 40% threshold.

Cohort default rates calculate the percentage of borrowers
entering repayment who have defaulted within a given time
period. If one calculates the percentage of total enrollment
that defaults within the 3-year window, in FY2007 0.9% of
students enrolled at public colleges, 1.2% of students
enrolled at private colleges and 10.2% of students enrolled
at proprietary colleges defaulted on their federal education
loans.

Of the 215,212 students who attended colleges with preliminary
3-year cohort default rates above the 30% threshold (and with
more than 30 students in repayment) in FY2007, 148,760 (69.1%)
were enrolled at for-profit colleges, 53,575 (24.9%) at public
colleges and 12,877 (6.0%) at private colleges.

Of the 23,498 students who attended colleges with preliminary
3-year cohort default rates above the 40% threshold (and with
more than 30 students in repayment) in FY2007, 21,503 (91.5%)
were enrolled at for-profit colleges, 161 (0.7%) at public
colleges and 1,834 (7.8%) at private colleges.

I believe that these figures represent a high water mark for the following reasons:

1. Income-based repayment became available on July 1, 2009.
Borrowers in income-based repayment count in the denominator
but not the numerator in calculating the cohort default rate,
just like deferments and forbearances. I believe there will be
a significant number of borrowers using income-based repayment,
which will tend to decrease the default rates. This is partly
because income-based repayment is more available and better
marketed than income-contingent repayment and partly because of
the added incentive of public service loan forgiveness.

2. Colleges have enough time before the 3-year default rates are
used to enforce eligibility for federal student aid to reduce
their default rates through aggressive counseling of borrowers
who are at risk of default (e.g., low income borrowers, borrowers
who do not finish their education), adjusting admission eligibility
standards and through "averaging down" of high default rate programs.

3. New unemployment filings and overall unemployment rates have started
decreasing and job creation will gain momentum in 2010. Job placement
rates are one of the three primary drivers of defaults. The other
drivers are interest rates and graduation rates. (Average borrower
interest rates increased in FY2007 as compared with FY2006 and
FY2005
because of the switch to fixed rates on July 1, 2006 increased the
Stafford loan from 4.5% to 6.8%, a big jump. Likewise the introduction
of the Grad PLUS loan increased the average borrower interest rate on
federal loans. The cuts in subsidized Stafford interest rates for
undergraduate students will start yielding a decrease in average rates
with the FY2008 cohort.)

Mark Kantrowitz
Publisher of FinAid.org and FastWeb.com

A Loan Sticking Point Clarified and Accentuated

Recently, Mark Kantrowitz, Founder, Finaid Pages, documented solutions in the loan market for post secondary education.

Mary Lyn Hammer, CEO, Champion College Solutions, wrote into point out a detail in Mr. Kantrowitz's presentation:

During a session at last week’s IIR conference in Phoenix, a statement was made that schools could voluntarily withdraw from the Federal Student Loan Programs and remain in the Pell Grant and other Title IV Programs. This statement was inaccurate. The following is documentation for your review.

Voluntary Withdrawal from Loan Program and Retain Pell Eligibility

In the 1998 Higher Education Amendments, Title IV, Part A, Sec. 401 (f) (2) it states, “This subsection shall not apply to an institution that was not participating in the loan program authorized under part B or D on the date of enactment of the Higher Education Amendments of 1998, unless the institution subsequently participates in the loan programs.”

This is further defined in the Official Cohort Default Rate Guide as, “A school will not be subject to loss of Federal Pell Grant Program eligibility if a school officially withdrew (in writing) from the FFEL Program and/or Direct Loan Program on or before October 7, 1998 OR lost its eligibility to participate in the FFEL Program and/or Direct Loan Program on or before October 7, 1998 OR did not certify any FFEL Program and/or Direct Loan Program loans on or after July 7, 1998.”

Summary:

The voluntary withdrawal option was statutory and only available if the school made no loans on or after July 7, 1998 and voluntarily withdrew from the Federal Student Loan Programs on or before October 7, 1998.

Mr. Kantrowitz responds:

As I said at the conference, if a school is close to the limits but not over, they can preserve Pell Grant eligibility by withdrawing from the federally(sp) loan programs. The voluntary withdrawal program was regardless of whether the school was over the cohort default rate limit. What I was discussing is schools that are close to but not over the limit, but so close that they are concerned that they might lose eligibility.

An example might help illustrate. Let's suppose that a college is at 14% now and will be at 28% after the change. Right now they don't have any problems vis a vis the 25% threshold, but after the change to a 3 year window they may be very close to the 30% threshold. If they were concerned that they might go over the limit in the future, they could choose to stop offering federal education loans. So long as they were under the 30% threshold for one of the next three years, they wouldn't be subject to sanctions and so could continue to offer the Pell Grant. I am assuming that the number of loans entering repayment would rapidly drop below the 30 loan minimum.

Or consider a school that is at 20% now. They know that they will be over the 30% threshold and have no way of getting under it. If they opt out now, by the time the threshold goes into effect they will no longer have enough loans entering repayment to affect eligibility.

So while there is no formal voluntary withdrawal program now, schools can still manipulate the cohort default rate definition to opt out to preserve Pell Grant eligibility.

EIIF Announces New Speakers for 2009

The following speakers are coming to EIIF in Phoenix March 9-11, 2009:

Mark Kantrowitz, Founder, Finaid.org
George Bernstein, CEO, Nobel Learning Communities
Howard Block, Managing Director, Knowledge Investment Partners
Brooke B. Coburn, Managing Director and Co-head of Carlyle Venture Partners III
Mark DeFusco, Managing Director, Berkery Noyes
Peter Leyton, Partner, Ritzert & Leyton
Ted Mitchell, Managing Director, New Schools Venture Fund
Charles Thornburgh, President, Kaplan Virtual Education
Matt Leavy, CEO, eCollege
Daniel Pianko, Principal, Noah Fund
Rita Ferrandino, Managing Director, ARC Capital Development
John Katzman, CEO, 2Tor and Founder of Princeton Review
Jordan Goldman, Founder, Unigo.com

and there are over 45 other names.

Stay tuned to the blog for the agenda, and please consider your company for a presentation at the 2nd Annual FuturEd Symposium where you could be one of five innovative companies presenting to investors.

You can also visit our homepage for the latest in registration news, and administrative information.

A white papers site is coming soon. That will be a one-stop resource for all of the information you need to stay ahead in the education industry.

Student Loans Hard to Come By in Arizona

Many of you will know about this funding issue in post secondary for-profit schools, but I am putting this link here to keep the story in view.

Many students heading off to college or vocational schools in coming days will learn a tough, if timely, lesson in economics: The credit crunch has made some education loans harder to get.

"Most of the lenders, if not all of the lenders, are making private loans more difficult," said Fred Lockhart, executive director of the Arizona Private School Association.

Mark Kantrowitz, publisher of finaid.org, a well-known, financial-aid Web site, said that about 130 lenders have suspended participation in federal loan programs and that 29 have stopped issuing private education loans.

About 47 percent of families borrow money to help get kids through college, according to a study released Wednesday by lender Sallie Mae and Gallup.

The study affirmed that federal loans are easily the most popular source of borrowing.