New law could force colleges to help with delinquent student loans

  • LendEDU analyzed Department of Education data on student loan default rates and found that the rate is higher for public colleges than for private colleges.
  • This can be due to a number of reasons. Students in private schools may not be so dependent on student loans, or schools may have reduced their dependence on student loans.
  • However, the default rate in for-profit schools was 15.20% – and several had rates over 40%.
  • One way to hold colleges accountable would be to take steps such as re-authorizing the Higher Education Act, which would require schools to take part of the financial risk of student loans.
  • Visit the Business Insider homepage for more stories.

Each year, the Department of Education publishes student loan default rates for more than 4,000 institutions, including non-traditional higher education institutions like for-profit and cosmetology schools.

This year, the Department of Education released data on defaults for the 2016 fiscal year on September 23. The information reflects student loan borrowers who started repaying in 2016 and whether or not they defaulted in 2016, 2017 or 2018.

LendEDU analyzed this dataset, which includes 4,425 institutions, to publish a comprehensive report detailing default rates by school, school type and state.

There have been a number of interesting results, but perhaps most surprising of all is that the collective default rate in public colleges was three percentage points higher than the rate in private non-profit institutions. .

Public colleges are cheaper than private ones, so why are their default rates significantly higher?

LendEDU’s most recent report on student debt by school and state found that the average student debt per borrower in private nonprofit institutions was $ 38,186, while the comparable figure in public schools was $ 38,186. $ 27,524.

Additionally, the average cost for a single year at a four-year nonprofit institution is $ 50,900, compared to $ 40,940 at a four-year public college as an out-of-state student. For a state student, that number drops to $ 25,290.

So why is the student loan default rate at public colleges 9.60% versus 6.60% in private institutions?

copy default rates by school type 2019 bi

Courtesy of LendEDU

One likely reason is that private institutions generally offer graduates a higher earning potential than public colleges and universities. In a report released by PayScale, the vast majority of schools in the top 25 for median starting salaries were private institutions.

With private colleges offering a greater likelihood of landing a well-paying job after leaving campus compared to public schools, students can tackle student debt more aggressively and worry less about missing monthly payments and defaulting on debt. their student loans.

Another thing to consider is that many private institutions, especially Ivy League schools like Princeton and Brown, are at the forefront of developing programs to limit the need for student debt to attend. .

In addition, the student body at more expensive private colleges may very well come from more affluent families who reduce the reliance on student loans.

All things considered, the respective default rates of private and public institutions are far from close to the rate of the much-maligned for-profit institutions.

For-profit schools have 15.20% default rate, some at risk of losing federal funding

In for-profit institutions, the student loan default rate was 15.20%. This is not entirely surprising as these schools have long been publicized for their predatory behavior.

Many of these places will charge exorbitant tuition fees while falsely promising high placement rates; this leads students to take on more student debt than they probably should and end up in an inevitable financial hole.

copy schools with three bad years by default bi

Courtesy of LendEDU

As the chart above indicates, many of these for-profit (or proprietary, as the original report calls them) institutions are now at risk of losing their eligibility for federal financial aid – including federal student loans and Pell grants – due to default rates.

copy schools with bad bi default rate year

Courtesy of LendEDU

And, there are even more for-profit schools that are likely to lose federal student loan funding for a most recent default rate of over 40%.

Cutting federal funding is one way to try to reduce default rates, but there is another potential method that has gained traction in our nation’s capital.

Hold colleges accountable by paying off student loans

An additional control that can be placed on schools that consistently have high debt and default rates is to make these institutions responsible for helping students pay off student debt.

Reauthorization of the higher education law is currently stalled on Capitol Hill, but one of the potential pillars of the law would be for Congress to “require colleges and universities to share some of the associated financial risk. to student loans, taking into account the actual loan repayment rate. “

By allowing such a component, colleges and universities might think twice about raising tuition fees, forcing students to incur student debt that could hurt them financially for decades after graduation. graduation.

The US student debt situation is not ideal, as evidenced by high default rates and skyrocketing debt numbers. By addressing the problem at its root – the colleges and universities themselves – perhaps we can begin to lift our nation out of this hole of student debt.

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