DOE gives some institutions a break on loan defaults

Community colleges, HBCUs spared

The Department of Education (DOE) waived financial penalties for some institutions that did not meet the new student loan default standards, officials announced Tuesday.

Five years ago, Congress expanded the monitored default rate period to three years after graduation, making it harder for institutions to manipulate their numbers. In the past, some schools consistently used forbearances and deferments to push defaults past the former two-year window.

Today, penalties are supposed to hit when a school's share of students defaulting on loans surpasses 30% three years in a row or 40% in one year. Penalized schools cannot award federal student aid.

But right before the new standards kicked in, the DOE "adjusted" the default rates of institutions to account for "split servicing," when borrowers have loans assigned to more than one servicer. The department decided not to count students who defaulted on only one loan, but had at least one other in forbearance, deferment, or repayment.

This resulted in schools "not being subject to a potential loss of eligibility" for the Direct Loan Program or Federal Pell Grant Program.

DOE did not announce how many of the two to three dozen institutions at risk of losing eligibility were spared, but noted no historically black colleges or universities would be penalized.

Colleges praised the news, but student and consumer advocates denounced it, questioning the decision to relieve institutions—but not borrowers.

"Any changes in the student-loan system that reduce transparency and consistency may compromise our ability to hold poor-performing colleges accountable," writes Rep. George Miller, (D-California), of the House education committee.

Rates on the rise

Default rates continue to climb, despite colleges' scramble to bring them down.

Community colleges' rates increased from 13% to 21% in the past six years, and a growing number of institutions enlisted third-party vendors to manage their rates.

In 2013, the two-year default rate was 10%, the highest in nearly 20 years. The three-year rate nearly hit 15% (Field, Chronicle of Higher Education, 9/24; Baker, Department of Education, 9/23).

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