Students have much to worry about when choosing a college.
And a new Education Sector study, In Debt and in The Dark, adds one more stressor. It advises students to look closely at an institution’s student-loan default rate while making a decision on higher education. It turns out that student-loan default rates are higher than the graduation rates at 514 American colleges and universities.
More than half are for-profit colleges, and one-third are community colleges, which often serve low-income students.
This education can be hazardous to your financial health. At this institution, you have a higher probability of defaulting on your student loan than you do of completing this program.
The numbers are so staggering that, according to the report, financial aid expert Tim Ranzetta suggested that some colleges post this warning: “This education can be hazardous to your financial health. At this institution, you have a higher probability of defaulting on your student loan than you do of completing this program.”
Part of the problem is that the government doesn’t do a very good job of collecting data on loan defaults.
“Given the importance of defaults, and the recent jump in their numbers, it makes sense for the government to provide more detailed information on defaults, not just as an accountability lever but as a basic consumer right,” Andrew Gillen, research director at Education Sector, said in a release.
In recent years, student college-loan default rates have nearly doubled, and the three-year default rate exceeds 13 percent nationally. Outstanding student-loan debt in the United States is nearing $1 trillion. With Congress failing to prevent the doubling of interest rates this week on new federal subsidized Stafford loans, that amount is likely to increase.
“The doubling of interest rates will make the cost of the loans increase, which will cause more students to default on their loans,” Dean Tsouvalas, editor-in-chief of StudentAdvisor.com and the Scholarship Advisor app, told TakePart. “Less people will be able to afford higher education.”
He said that subsidized Stafford loans comprise 26.2 percent of new student loans in 2013.
According to the Education Sector study, a loan is considered to be in default by the Department of Education when a borrower is more than 270 days behind on payments. When the federal government calculates the default rate, it only includes Stafford loans and ignores other loans such as ParentPLUS, GradPLUS, and Perkins.
Colleges and universities currently report loan-default information. But while you can see the “percentage of borrowers who attended those schools and defaulted at some point in the first three years of the repayment period,” that’s all you can learn.
The researchers argue that information must include more detailed data.
Consider Pell grants, given primarily to poor students. If you want to see how many of one school’s Pell grant students defaulted compared to how many of the school’s other students defaulted, you are out of luck. Likewise, you can’t find out how defaults among Pell grant students at one school compare to defaults of Pell grant students at another school.
The study recommends that policymakers overhaul how the federal government measures and reports data on student-loan defaults. But until Washington acts, how can students maneuver the tricky waters of student loans and not become a default statistic?
Taking a loan out for higher education is much like running a business, Tsouvalas said. In that way, students need to know what they are getting in exchange for their loan. He suggests always asking about a college’s job placement rates.
“It is time for colleges to work within their communities to identify the jobs that are available and teach those skills,” he said. “There needs to be a collaborative approach so that students are able to find jobs when they graduate. If a student is looking at poor job prospects, they are much more likely to drop out, default on their loan, and a vicious cycle begins.”