Office of Planning & Budgeting

December 21, 2012

Senators Ask ED to Investigate For-Profits’ Strategies to Lower Default Rates

Last Wednesday, eight Democratic senators sent a letter to the U.S. Department of Education (ED) asking Education Secretary, Arne Duncan, to investigate strategies that some for-profit colleges allegedly use to falsely lower their cohort default rates (CDRs)—the rate at which student borrowers default on federal loans. Institutions with high CDRs can face penalties including a loss of eligibility for federal student aid programs.

The letter cites a recent Senate Committee report, which presents evidence that for-profits routinely use two tactics
in particular to manipulate CDRs:

  1. “Encouraging or even harassing borrowers” into forbearances or deferments, which can delay default until after the
    period for which CDRs are typically reported; and
  2. Manipulating campus and program categorizations in a way that makes their default rates artificially low.

The senators argue that “for-profit schools should not be able to use administrative smoke and mirrors to circumvent regulations that protect students and taxpayers, and the department should take action to prevent these tactics.” Some for-profits have admitted to using such strategies to “manage” their CDRs, but they deny that doing so conflicts with their students’ best interests.

For-profits consistently average higher default rates than all other higher education sectors.  Of the students who began repaying loans in 2009, 22.7 percent of students at for-profits defaulted within three years, while only 11 percent of public students defaulted in that timeframe, and only 7.5 percent of private nonprofit students. In contrast, the UW’s three-year CDR was an impressively low 3.1. 

Comparing for-profits’ two-year CDRs with newly-reported three-year CDRs reveals a major, and potentially damning, discrepancy. Fifty percent more students from for profits’ defaulted in the three-year timeframe than in the two-year timeframe. The senators say this “raises serious questions about how widespread the use of such tactics may be across the sector.”

ED has yet to respond to the senators’ letter.