Starting this fall, colleges will be held to a higher standard for keeping their student-loan borrowers out of default, and that has some student-aid administrators very nervous. Colleges that fall short could lose their eligibility to award federal student aid, the lifeblood of most colleges.
That looming threat made managing default rates a hot topic at a gathering of financial-aid administrators here this week, with many of them sharing ways to limit student debt and rein in defaults.
Community colleges are particularly desperate to bring down their default rates. Over the past six years, the percentage of community-college borrowers who defaulted on their student loans within three years of entering repayment has risen from 13 percent to nearly 21 percent. If the sector doesn’t improve its rates this year, some of its colleges will be kicked out of the federal aid programs.
Under the new standard, colleges will be accountable for their three-year default rates, rather than the two-year standard used now. Penalties will take effect if a college’s cohort default rate exceeds 30 percent for three years in a row, or 40 percent in a single year. As many as two to three dozen colleges are at risk of losing their eligibility this fall, according to Jeff Baker, head of the Education Department’s Office of Federal Student Aid. <Read more.>