College debt: To lower defaults, link federal funds to grad rates

Fourth in a series.

Limiting the growth of future debt requires taking preliminary steps, most urgently for nontraditional and nongraduating students at nonselective institutions without unduly impairing educational access. This category of debt is most pressing because most loan abuses – and ruinous consequences of default – seem to be concentrated here.

The national 2012 three-year cohort default rate was 11.8 percent. In North Carolina, the rate was 11.1 percent, with Triangle institutions being even lower. Duke University’s was 0.6 percent, UNC-Chapel Hill was 1.6 percent and N.C. State’s 3.4 percent. All other area institutions, except for historically black colleges and universities, were at about 6 percent or less. The area HBCUs did not fare as well, with N.C. Central University, Shaw and St. Augustine at 13.3 percent, 18.2 percent and 23.3 percent, respectively.

Department of Education data show the average 2013 six-year, first-time, full-time national graduation rate at four-year institutions was 59 percent total, 58 percent at public schools, 65 percent at private schools and 32 percent at for-profit schools. North Carolina public institutions do better than the national average, with a 61.2 percent average six-year graduation rate, while private institutions perform worse, at 58.5 percent. The graduation rate at Triangle institutions was higher: 90 percent at UNC-CH, 75 percent at NCSU and 95 percent at Duke. Internationally, America has been slipping. In 1995 the United States ranked 1st in graduation rates among OECD states but recently became 19th.

The most straightforward method to improve these numbers – while balancing the competing priorities of educational access and practical economic outcomes – is linking the availability of federal dollars to minimum acceptable six-year graduation rates and maximum acceptable three-year default rates.

To that purpose, we would:

▪  Phase in requirements for all institutions accepting federal funds to develop and submit to the Department of Education comprehensive multi-year plans to achieve minimum acceptable six-year graduation rates for all students (say 66.7 percent) commencing with the six-year cohort entering in four years. That gives four-year institutions at least 10 years to demonstrate compliance. Noncompliance would result in a series of sanctions leading up to disqualification from receiving federal funds.

▪  Lower the institutional default threshold for participation in federal education finance programs to 20 percent. The Higher Education Act of 1965 disqualifies institutions with three-year cohort default rates exceeding 30 percent from participation in the Federal Direct Loan program, the largest federal student loan program. But of 6,070 institutions listed on the DOE’s default rate database (2010-2012), only 15 are reflected as subject to any loss of program eligibility!

However, for institutions with mission-driven access for historically disadvantaged populations, we would propose a more flexible multi-year plan focused on generally increasing graduation rates and decreasing default rates, rather than meeting minimum targets that may not be feasible. A prime example of these types of institutions are the roughly 100 remaining HBCUs, which are concentrated in the South, and several of which – including North Carolina A&T, the largest – are in North Carolina. A slightly different track is appropriate for these institutions because they do not yet enjoy the support infrastructure of majority-patronized institutions and because, unlike for-profit institutions, their default rates do not arise from abuse of the federal loan system but from several factors including less favorable labor market outcomes of historically disadvantaged populations.

▪  Require that all students applying to all institutions and programs receive better disclosures about institution/program performance upon admission, because student debt can make not finishing college worse than not starting college. We should require simplified disclosure by academic institutions of graduation rates, estimated debt burden and labor market outcomes to all admitted students. The DOE College Navigator is an excellent tool, and the gainful employment rules are a good start, but institutions are better able to determine their own graduates’ labor market outcomes, which would provide more meaningful information than the Department of Labor’s Occupational Outlook Handbook.

The Gates Foundation is right to advocate predictive analytics and individualized need-based targeted support for at-risk students. In Charlotte, Johnson C. Smith University is experimenting with innovative approaches using these tools. Grants should be provided to more schools to explore and develop methods to address the unique needs of their students using these types of approaches, and we hope the Gates Foundation, along with the government and other philanthropists, will provide funding for that effort.

This story was originally published June 24, 2016 at 5:57 PM with the headline "College debt: To lower defaults, link federal funds to grad rates."