HBCU Case Study Documents How Schools Can Help Students Pay Back Loans

They are called recession graduates. They have moved back home; they are just beginning to understand what their credit score means; and after four-plus years of attending their choice school they find themselves jobless or under-employed.

Without the money to pay back thousands of dollars in school loans, increased defaults will debilitate a growing number of graduates — many of whom came from low-income households and attended schools as first-generation college students — and their institutions will suffer stiff penalties due to having increased rates of delinquent borrowers.

A new report from the Washington-based Education Sector organization released Tuesday called “Lowering Student Loan Default Rates: What One Consortium of Historically Black Institutions Did to Succeed,” argues that institutions can work proactively to reduce default rates among former students using “default-aversion” strategies. Education Sector is an independent, nonpartisan think tank that develops progressive education policy ideas and proposals.  

A high cohort default rate (CDR)— the number of defaulters divided by the number of borrowers calculated annually by individual schools — could render some institutions ineligible for federal aid thus endangering their ability to enroll students.

“The latest cohort default rates, which track students who left school in 2007, showed the largest increase since 1989, with 6.7 percent of (U.S.) students defaulting on their federal loans.,” the report states. “The classes of 2008 and 2009 face bleak job prospects, putting more students at risk of defaulting and suffering its consequences — ruined credit and mounting debt from accumulated collection fees and unpaid interest.”

Since it usually takes roughly 14 months after graduation for defaults to show, most colleges and universities can keep their default rates low for recent graduates for the two-year period prior to when institutions have to report their CDRs for a given graduate cohort to the U.S. Education Department.

In 2009, only two U.S. higher education institutions out of several thousand faced sanctions, the report said.

However, with the federal Higher Education Opportunity Act (HEOA) passed in 2008, colleges and universities will have to track student cohorts for three years, increasing the likelihood schools will see more defaulters in their reported numbers, said Erin Dillon, senior policy analyst and co-author of the Education Sector report.

“So each institution will see increased (default) rates,” Dillon said. Since the government began measuring the default rate in the early 1990s, nearly 1,000 schools have been denied participation in the Pell Grant program and other aid, the report said.

For-profit institutions have protested the punitive HEOA changes, blaming student demographics for CDRs that surpass the government’s threshold. The Career College Association, which lobbies for for-profit institutions, said the new sanctions will disproportionately punish their schools, which account for 44 percent of all defaults, for admitting at-risk student populations who typically have more financial problems, according to the report.

But the report says graduation completion rates and other factors are more significant predictors of student default than race or class.

“Institutions do matter in lowering student loan default, even though demographics are a factor they are not the main factor,” said Education Sector editor and report co-author Dr. Robin Smiles. “We found pretty powerful evidence that shows there is a lot an institution can do to improve the likelihood a student will graduate.”

Focusing on degree completion, the co-authors said, concurrently improves default rates for students who better their job prospects with full degrees. Those who don’t finish, they say, have a harder time finding well-paying jobs and repaying loans.

In the report, 12 federal aid-dependent historically Black colleges and universities (HBCUs) made radical changes to their financial aid processes to avoid losing eligibility. Those practices, including the creation of “default manager” position and tracking contact information for students after graduation, resulted in dramatic drops in the number of defaults. Seven of the 12 schools are Texas-based HBCUs. The seven are Huston-Tillotson, Jarvis Christian, Paul Quinn, Southwestern Christian, Texas and Wiley colleges and Texas Southern University.

Following  steps like the ones attributed to the 12 HBCUs in the report, Dillon said, can keep institutions safe from government cut-offs.