Delinquency and Default, Partners of Despair

You’ve got to walk before you run and you’ve got to be delinquent before you default. To remedy student loan default, you have to first deal with student loan delinquency, that’s according to a recent study by the Institute for Higher Education Policy. In its report, entitled “Delinquency: The Untold Story of Student Loan Borrowing”, the institute empirically makes the case that student loan delinquency is pervasive, adverse and should be viewed in conjunction with default.

Delinquency is defined as failure to make a payment within 60 days of its due date. Default is usually delinquency which lasts more than 270 days (360 days for FFEL or Direct Loans). Therefore, you have to get lost in the woods of delinquency before you fall into the abyss of default. But, as the study does point out, some who are delinquent do find their way out of the woods.

The study reviewed the payment history of 8.7 million student loan borrowers who were to begin repayment between October 1, 2004 and September 2009 with a more in depth focus on those who were to enter repayment in 2005. The results were sobering and when combined with student loan default, gave a much more complete picture of the entire student loan repayment problem – a picture that should concern us even more than just student loan defaults.

Out of the 2005 cohort (1.8 Million) of borrowers, 26 percent were delinquent at least once in their first five years of repayment and 15 percent defaulted during the same period. That means 41 percent of all borrowers had an adverse repayment experience. And when you factor in the 23 percent who were able to delay their repayment through deferment or forbearance, only 37 percent were able to make timely payments (note percentages do not sum to 100% due to rounding). That means only one third of all borrowers were able to stay current during the first five years. Does that mean that many of our students are being setup to struggle and some to fail? If so, then the effects can be severe and protracted.

The possible negative consequences of default are:

  • A negative credit ratings for 7 years which can make it difficult or impossible to borrow to buy an auto or home
  • Aggressive collection actions
  • A lawsuit against you for entire amount and collection and  litigation costs
  • Addition of higher interest rates and collection costs to your balance
  • No discharge in bankruptcy
  • Garnishment of wages, tax refunds or other federal benefits
  • Ineligible for deferments and future student financial aid
  • Loss of any subsidized interest rate on loan
  • Ineligible for Armed Forces service
  • Denial of a professional license
  • Lien on your home

For those who are delinquent, the consequences aren’t quite as draconian but a negative credit rating can adversely affect getting a job, finding an apartment, or purchasing a house, a car or any other consumer product or service needing financing. These are serious lifestyle ramifications and all for a loan that was to help a student achieve his or her American dream.

There is no doubt, that after this study, it is clear that default and delinquency need to be viewed as one. Let’s term it “student non-compliance” and use this combination as the true thermometer for student loan wellness.

The report drilled very deep in trying to discover the areas of high risk for student non-compliance. And what it unearthed is not surprising but still concerning.

The borrowers that earned their degree or certificate had a 22% delinquency and a 16% default for a 38% non-compliance. Whereas, those who did not earn a degree or certificate had a 33% delinquency and a 26% default for a 59% non-compliance

Those who last attended a two year public or for-profit or a four year for-profit had twice as high Non-compliance as those who last attended a four year public or private.

And, those whose highest grade level was first-year undergraduate had a 64% Non-compliance (30% delinquency/34% default) compared to a 27% non-compliance (21% delinquency/6% default) for those whose highest grade level was fourth-year undergraduate.

 Very simply, if you want to enhance student loan wellness, then it’s retention, persistence and graduation. There might be other factors to further examine but from this study, student success is one of the key remedies. Retaining them to the highest level and completing them at a higher rate will certainly act as countering force to student loan non-compliance.

When a borrower drifts into delinquency, interest rates and collection fees can cause the principal balance to balloon by two or three times. We’ve all heard the student loan horror stories featured in books like “The Student Loan Scam” or articles like the New York Times (April 9, 2009) “In Grim Job Market Loans Are A Costly Burden” or programs like the expose by NBC “Price of Admission, America’s College Debt Crisis”.

Although many of us have thought these extreme accounts have been anomalies, this study certainly lays a foundation that would make them much more prevalent. To dismiss them as sensationalism, is a mistake because they are representative accounts of a certain number of  borrowers’ experiences and are degrading the American public’s view of higher education and its value.

Steven Panagiotakos
Greenwood Hall

Steven Panagiotakos is the Senior Policy Advisor at Greenwood Hall. From 1993-2011 he was in the Massachusetts House of Representatives and the Massachusetts Senate, where he was the Chairman of the Ways and Means Committee.

Coming Soon: The Death of Accreditation

Many in higher education and particularly the for-profit sector were expecting the worst from the Department of Education as it handed down its final so-called gainful employment regulations. While far from ideal, several for-profit leaders I have spoken with are just thankful that the final rules were not as severe as they could have been. From my vantage point, gainful employment regulations no matter how flexible they might be highlight a dangerous trend in American higher education- the slow and painful death of our system of accreditation. More so, there is only one real alternative to accreditation – a United States Ministry of Education. This is what really keeps me up at night!

The new regulations DOE has implemented over the past two (2) years – rules that regulate how credit hours should be defined, subject schools to regulations of every state government outside of the jurisdiction a school has locations, and gainful employment are harmful and unprecedented intrusions. These regulations threaten institutional autonomy and our system of accreditation that is envied around the world. They also compromise America’s leadership position in higher education as well as quality, innovation, and access.

With each entry into the Federal Register, DOE has put rules in place that undermine accreditation agency roles and challenge long-sacred institutional independence from government. Washington can now indirectly influence which programs schools offer, program design, instructional methods, curriculum, academic standards, where schools can recruit certain students from, and even the setting of tuition rates!

While several administrators at private not-for-profit and public institutions point out that these new regulations were enacted to restrict the activities of certain bad actors in the for-profit sector, these regulations impact ALL institutions. They can be applied and expanded to further usurp institutional autonomy and our system of accreditation at anytime.

As the United States moves forward on the ill-fated path toward the establishment of a quasi Ministry of Education, our international counterparts are moving in droves away from public regulatory models and to a more American system of accreditation. One of the most extreme examples of contemporary government regulation can be found in France, which Chevalillier (1998) asserts was considered to be the “most centralized and bureaucratic system in the Western world.” Although there have been notable reforms in France since the late 1980s, their Ministry of Education still provides weekly directives to institutional administrators which include “instructions on every aspect of the life and work of their institutions.” Due to years of extensive centralized regulation, even with greater autonomy, many French institutions lack dynamic and progressive leadership, coherent strategic planning, and innovating as the result of an engrained culture of dependency on regulatory direction (Chevaillier, 1998).

Even proponents of public regulation acknowledge that institutions in countries with extensive regulation lack the prestige and excellence of schools that are found in the United States. Researchers, Jacobs and Van Der Ploeg (2006) found that top European students and academics flock to universities in the United States and that continental Europe, which has historically maintained extensive public regulatory structures over higher education, has only a handful of top-ranked post-secondary institutions compared to the United States.

Public regulation typically includes not only government-run accreditation organizations but can also include academic audits, performance based funding, national assessment examinations, and national standards (Dill, 2007). In many cases, however, a traditional public regulatory scenario includes significant government intervention that can include a centralized ministry of education hiring/appointing institutional administrators, interfering in instructional matters, and directly or indirectly managing day-to-day operations at the institutional level (Musselin, 1997).

Outside of the arguments about precedence and if public regulation is something we in higher education “want,” we need to look at efficacy. We have to look no further than our K-12 system to predict the success or failure of increased public regulation at the federal level. The No Child Left Behind Act (NCLB) was enacted in 2002 with admirable goals of enhancing student success, increasing accountability, and closing the achievement gap. I would argue that there are good elements of NCLB, especially those that expanded access as well as student and parental rights. On the other hand, multiple UCLA Civil Rights Project studies in 2009 found that this massive federal intervention failed to improve student achievement, undermined the efforts of the states to improve failing schools, and increased school segregation. NCLB has also created significant disruptions for our teaching professionals that have to teach to standardized tests versus educating our students.

There is no question that our higher education system and accreditation body oversight has its flaws. It can be argued until recently some of our accrediting bodies have been asleep at the wheel. Student persistence, the cost of higher education (and its return on investment), academic quality, student loan debt, operating inefficiencies, and institutional sustainability are all serious issues plaguing many of our post-secondary schools. Certain schools have performed terribly (i.e. low graduation rates, high default rates, the lack of job placement, financial problems, etc). Experience, however, shows us that federal intervention will not address these issues. In fact, if NCLB is a predictor, DOE’s continued intrusions into higher education will not improve student outcomes and could actually deny access to quality educational opportunities to disadvantaged students.

Accreditation agencies must address the aforementioned issues impacting higher education today and many of them have begun sustained efforts to do so. Our system of accreditation best supports the diversity of post-secondary institutions and can make the necessary improvements to become even more effective overseers of higher education quality (Eaton, 2007; Ikenberry, 2009). Further, the system of accreditation is cost effective and efficient compared to increased public regulation (Carnegie Foundation, 1982; Greenlaw, 2008).

With the amount of funds federal taxpayers are putting into the Federal Student Aid Program that go to post-secondary institutions, there is no question that DOE can and should play a role in preventing the abuse of federal funds by certain bad actors. Dictating to schools what programs they can or should offer, indirectly attempting to set prices, restricting where schools can recruit some students from, and getting into issues of instruction are not necessary for DOE to act as an effective steward of federal funds.

The best thing that DOE can do to improve the overall quality of our higher education system in all sectors is to support our accreditation agencies versus undermining their efforts and authority. Accreditation agencies are clearly in the best position to effect this change. DOE only needs to look at NCLB and countries around the world that are moving away from public regulation in favor of the American system of accreditation to understand how its continued regulatory encroachment in higher education will have devastating consequences to our higher education framework.

Everyone in higher education also has a responsibility to “save” our system of accreditation from a slow death. Accrediting bodies need to continue with reforms that will lead to quantifiable improvements in all areas of student success. Faculty and institutional administrations need to take decisive steps that improve operating efficiencies, reduce cost burdens being placed on students and families, provide proactive retention support, offer programs that best prepare our students for workforce needs, and turn sleepy career services offices into state-of-the-art bustling career placement centers. Education management and service providers also have a responsibility to help their institutional clients thrive in the aforementioned areas no matter what specific service they may provide a school. Finally, all stakeholders in higher education need to understand how dangerous DOE’s recent regulations have been for the entire system of post-secondary education. We need to all work together to prevent any further encroachment and detrimental impact to what still remains the strongest higher education system the world has seen.