Student Loans:

Default Rates Need To Be Computed More Appropriately

HEHS-99-135: Published: Jul 28, 1999. Publicly Released: Aug 27, 1999.

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Pursuant to a congressional request, GAO reviewed the Department of Education's method of calculating a school's student loan default rate, focusing on: (1) whether there has been an increase in the number of borrowers who entered repayment but subsequently received deferments or forbearances; (2) what effect would excluding borrowers whose loans were in deferment or forbearance have on the most recent default rate calculation; and (3) whether additional schools would have exceeded the 25-percent default rate threshold under the alternative method of calculating the default rate.

GAO noted that: (1) between 1993 and 1996, the percentage of borrowers with loans in deferment or forbearance more than doubled, from 5.2 percent of borrowers who had begun repaying to 11.3 percent; (2) this doubling was consistent across the various types of schools, including 4-year and less-than-4-year public and private schools as well as proprietary schools; (3) according to Education officials, the increase was attributable, in part, to provisions of the 1992 amendments to the Higher Education Act of 1965 that eased the requirements for obtaining deferments and forbearances as a way of helping minimize loan defaults; (4) excluding borrowers with loans in deferment or forbearance entirely from the calculation of the cohort default rate would have had the effect of increasing the overall default rate from 9.6 percent to 10.9 percent for 1996, the most recent cohort year for which data are available; (5) the proportional increases would have been roughly similar for the various types of schools; (6) for example, the rate at 4-year schools would have risen from 6.8 to 7.7 percent, while the rate at proprietary schools would have risen from 18.3 to 20.1 percent; (7) for the 1996 cohort, excluding borrowers with loans in deferment or forbearance from the calculation would have increased the number of schools with rates exceeding the 25-percent threshold by 181 schools, from 352 to 533, an increase of 51 percent; (8) under the law, these schools would have become ineligible to participate in student loan programs if their cohort default rate had exceeded the threshold for 3 consecutive years; (9) since 1991, the Department has denied participation in the programs to more than 1,000 schools because their default rates were too high; and (10) most of the additional schools that would have exceeded the threshold under the alternative calculation method were proprietary schools, but 12 were 4-year colleges and universities and 57 were public or private schools with degree programs of less than 4 years.

Matters for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: Congress held hearings on the reauthorization of the Higher Education Act (HEA) in 2006, but did not reauthorize it, relying instead on temporary extensions. In 2007, the House passed H.R. 4137, College Opportunity and Affordability Act of 2008, to amend and extend HEA. In February 2008, this bill was received in the Senate and referred to its Committee on Health, Education, Labor, and Pensions. As of June 2008, the Senate has not voted on this bill or proposed a companion bill.

    Matter: Congress may wish to consider amending section 435(m) of the Higher Education Act of 1965, as amended, to entirely exclude from the annual calculation of school default rates borrowers who are not in repayment by the end of a default cohort period because they have loans in deferment or forbearance.

  2. Status: Closed - Not Implemented

    Comments: Congress held hearings on the reauthorization of the Higher Education Act (HEA) in 2006, but did not reauthorize it, relying instead on temporary extensions. In 2007, the House passed H.R. 4137, College Opportunity and Affordability Act of 2008, to amend and extend HEA. In February 2008, this bill was received in the Senate and referred to its Committee on Health, Education, Labor, and Pensions. As of June 2008, the Senate has not voted on this bill or proposed a companion bill.

    Matter: Congress may wish to require the Secretary of Education to develop and implement procedures to ensure that borrowers excluded from a cohort's default rate calculation because of an authorized deferment or forbearance are included in a future cohort after they have resumed making payments on their loans.

 

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