The U.S. Department of Education is intensifying its scrutiny of colleges and universities regarding student loan default rates. New guidance issued this week outlines "best practices" for institutions to reduce defaults, warning that failure to meet obligations could result in losing access to crucial federal student aid programs. This move comes ahead of significant changes to federal repayment plans this summer.
Officials are emphasizing that while borrowers must repay their loans, institutions also share responsibility for preparing students for repayment. The department's actions signal a shift towards holding schools more accountable for the financial outcomes of their graduates.
Key Takeaways
- Education Department issued new guidance to colleges on reducing student loan default rates.
- Schools risk losing federal student aid if default rates exceed specific thresholds.
- Over 5 million student loan borrowers are currently in default.
- New Repayment Assistance Plan (RAP) will become the primary income-driven repayment option this summer.
- Advocates worry new repayment plans may lead to higher default rates due to less flexibility.
Federal Aid at Risk for High Default Rates
Universities face serious consequences if their student loan default rates remain high. The Department of Education explicitly stated that institutions with a cohort default rate exceeding 30 percent for each of the three most recent fiscal years could lose access to the Direct Loan program. Additionally, a school is at risk if its most recent fiscal year default rate surpasses 40 percent.
The cohort default rate measures how many borrowers default within three years of entering repayment. This metric differs from the nonpayment rate, which tracks borrowers more than 90 days delinquent since January 2020. The department has identified 1,800 schools with nonpayment rates at or above 25 percent, indicating a potential future rise in default rates.
Default Statistics
- More than 5 million student loan borrowers are in default.
- A borrower defaults after 270 days without a payment.
- Default damages credit scores and can lead to wage garnishment.
Institutions' Role in Student Success
The Education Department believes colleges are vital in guiding students towards successful loan repayment. Under Secretary of Education Nicholas Kent underscored this point.
"With nonpayment rates rising at hundreds of colleges and universities across the country, institutions must do more to support successful loan repayment outcomes," said Under Secretary of Education Nicholas Kent. "Student borrowers have an obligation to repay their loans, but institutions also share a responsibility to ensure their students are prepared to enter repayment and understand the consequences of nonpayment. Institutions cannot benefit from taxpayer dollars while ignoring the fact that a significant share of their students are not well-prepared to repay their loans. It’s time for institutions to step up or risk losing access to federal student aid."
Experts acknowledge that colleges play a crucial role in providing information to students about their loans. However, some express concern that the department's guidance places too much blame on institutions for broader economic challenges affecting borrowers.
Understanding Default
Student loan default occurs when a borrower fails to make payments for a specified period, typically 270 days. This has severe consequences, including significant damage to credit ratings, potential wage garnishment, and loss of eligibility for future federal student aid. Defaulted loans can also accrue additional fees and interest.
Upcoming Changes to Repayment Plans
Major changes are on the horizon for the student loan system. This summer, the new Repayment Assistance Plan (RAP) will become the sole income-driven repayment (IDR) option for future borrowers. This plan adjusts payments based on an individual's income. The only other choice will be the standard plan, which bases payments on loan size, with repayment timelines ranging from 10 to 25 years.
Advocates are worried these new plans will lead to an increase in default rates. They argue that the RAP plan may not offer the same level of flexibility as current repayment options, potentially pushing more borrowers into financial distress.
Concerns About Affordability
Christopher Madaio, senior advisor of accountability at the Institute for College Access & Success, voiced significant concerns about the affordability of the new plans.
"Our concern with the plans are, of course, on affordability of them, and so that is the biggest challenge, how they’re going to affect students who have to make higher monthly payments … a small cost of living raise can really drastically affect how much someone can be forced to repay under the RAP plan. So, those are the types of things that could easily cause students to miss payments and then go into non-repayment and potentially go into default," Madaio explained.
There is also concern about the potential for institutions to steer students into forbearance, a temporary pause in payments, which can mask underlying issues without addressing the root cause of repayment difficulties. While forbearance can provide short-term relief, it can lead to increased interest and extended repayment periods, ultimately harming borrowers.
The Education Department maintains that institutions must ensure their services genuinely prepare students for the workforce and help them manage the debt they acquire. Ellen Keast, agency press secretary, stated, "It’s time for institutions to acknowledge whether their services are truly preparing students for the workforce, and help both current and past students responsibly manage the debt they helped saddle them with."
The Path Forward for Colleges and Borrowers
As these changes approach, colleges face increased pressure to implement effective strategies for student loan counseling and support. This includes providing clear information about repayment options, financial literacy, and career services that lead to gainful employment.
The goal is to reduce the burden of student debt and ensure that federal aid programs continue to serve their intended purpose: expanding access to higher education without creating insurmountable financial challenges for graduates. The ongoing dialogue between the Education Department, institutions, and student advocates will shape how these policies impact millions of borrowers in the coming years.
