Hundreds of colleges could lose federal student loans due to default rates, economist says

Hundreds of colleges are in the “danger zone” of potentially losing access to federal student loans, according to an analysis by a higher education economist. However, it seems unlikely all will be sanctioned by the Department of Education, Preston Cooper told The College Fix.

The Cohort Default Rate measures the percentage of borrowers who default on their loans, and require a repayment plan, within a three year period. If the percentage gets too high, meaning graduates are taking on more debt than they can afford, the school can lose the ability to offer taxpayer-backed student loans. Because of approximately four years of paused payments due to COVID measures, colleges have not had a default rate for several years now. That could be changing, Cooper said.

“Over 1,000 colleges are flirting with the default rate threshold necessary to trigger a loss of access to federal student aid,” Cooper wrote in an analysis on his Substack. He’s also an economist for the American Enterprise Institute.

Of these 1,000 colleges, 400 of them “have a student loan nonpayment rate above 40 percent, which could trigger a loss of some federal aid in just one year.”

“Another 700 have a nonpayment rate between 30 and 40 percent, which would trigger a loss of aid if sustained for three years,” he wrote. “Several hundred more colleges have a nonpayment rate between 25 and 30 percent—close enough to the danger zone to make them nervous.”

However, Cooper told The Fix it could be several years before enforcement action is taken, giving colleges time to find a solution.

“The relevant cohort default rates probably will not be published until next year or possibly even the year after, and then there’s a lengthy appeals process, so CDR will not be enforced immediately,” he said via email. “However, if I’m a college in the danger zone, I’d want to be thinking about taking proactive measures to help students avoid default today.”

This gives colleges in the danger zone a chance to take action and salvage their situation before having their funding removed, but only if they quickly take action.

“Nothing will make them completely safe, but colleges should be reaching out to recent alumni, advising them that student loan payments have resumed, and helping them understand their options to begin repayment,” Cooper said.

He said colleges “have figured out how to game the metric” and take advantage of a “generous appeals process” so few have lost aid in the recent years. 

“That could change soon, though, as student loan nonpayment rates have skyrocketed relative to where they were pre-pandemic,” Cooper said.

The Fix reached out to the Department of Education several times via email and phone to ask for comment on Cooper’s research and enforcement of the Cohort Default Rate rule, but no one responded in the past three weeks.

The Fix also reached out to the American Association of Colleges and Universities as well as the Progressive Policy Institute for comment on Cooper’s research and the CDR. Neither responded to multiple inquiries in the past three weeks either.

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