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How Would Tying Student Loans to Repayment Rates Affect Higher Education?

As the U.S. Department of Education considers linking colleges’ and universities’ eligibility for federal student financial aid to the school’s student loan repayment rate, some analysts are looking at just how large the student loan default problem is and what might happen if new student loan repayment rules take effect in 2012 as expected.

Defaults on student loans can be measured in a number of ways, but one of the most common measures of default is the official cohort default rate, defined by the Department of Education as the percentage of a school’s student loan borrowers who enter repayment on certain federal education loans “during a particular federal fiscal year, Oct. 1 to Sept. 30, and default or meet other specified conditions prior to the end of the next fiscal year.”

In other words, the cohort default rate is the percentage of borrowers who enter repayment on their federal student loans and then either stop making payments on their student loan debt or never make payments at all during the 12–24 months after entering repayment.

Student Loan Default Rates vs. Repayment Rates

Government analysts now want to look more closely not at schools’ default rates on federal college loans but at schools’ repayment rates on those loans.

Consumer and student advocates have long argued that the cohort default rate, as currently measured, severely underrepresents the proportion of a schools’ students who are struggling with college loan debt by looking at only an initial 24-month period. The two-year snapshot, these critics maintain, misses a large swath of students who are able to muddle through making their payments for the first couple years but then begin defaulting in the third and fourth years of their repayment periods in accelerated numbers.

The default rate also fails to take into account those students who aren’t able to make payments on their student loans but who aren’t considered to be technically in default because they’ve arranged for a student loan debt management plan that permits them to put off making payments on their federal college loans.

In proposed rules that would regulate a school’s eligibility for federal student aid, the Department of Education would consider a school’s student loan repayment rate and not simply its default rate, as current regulations do.

By expanding its institutional financial aid eligibility rules to include student loan repayment rates, the Education Department would be looking at how many students simply aren’t repaying their student loans — not only counting borrowers who have defaulted, but including those borrowers who are in a legitimate deferred repayment plan or approved forbearance period that allows them to temporarily forgo making their federal student loan payments.

The Student Loan Debt Problem, as Measured by Repayment Rates

Earlier this year, the Department of Education reported that the national cohort default rate was 7 percent for the 2008 fiscal year, the last year for which repayment data are available.

Looking at repayment rates, on the other hand, while also expanding the time span over which student loan repayment is measured, yields a far larger non-payment rate among student loan borrowers and paints a truer picture of the size of the inability-to-repay problem among student loan borrowers.

The Department of Education estimates that in 2009, among alumni of public universities who carried federal student loan debt, only 54 percent of those who had graduated or left school within the last four years were in repayment on their federal student loans — a far cry from the 93-percent national non-default rate of 2008.

The four-year repayment rate was marginally higher for students at private nonprofit universities, at 56 percent. Perhaps predictably, the repayment rate among alumni of private for profit colleges was substantially lower — just 36 percent over four years.

These figures come from a new repayment database that the Department of Education will use to track government-issued student loans, from the time they’re issued until the time they’re paid off. The database can also track what happens in between.

By looking more carefully at each loan’s entire lifespan, the Education Department hopes the database will help identify the point at which borrowers first begin to show signs of trouble repaying their federal college loans.

Schools’ Student Loan Problems Could Mean Loss of All Financial Aid

As the government’s proposed financial aid rules are currently worded, the new rules would allow the Department of Education to impose financial aid restrictions on schools whose overall student loan repayment rate falls below 45 percent.

Schools that have a repayment rate of lower than 35 percent would face the loss of federal student aid altogether.

Using the Education Department’s 2009 data, more than half of the higher education institutions in the United States would face some type of federal student loan sanctions if the proposed financial aid rules were in effect today, and 36 percent of post-secondary institutions would be barred from offering federal student aid for a period of at least two years.

However, the proposed new Department of Education rules will also allow schools to report student loan repayment rates separately by program. By segmenting out repayment rates by program, institutions could avoid school-wide federal financial aid sanctions, leaving intact federal student aid for academic programs whose repayment rates are within the established guidelines, while still receiving sanctions for programs whose graduates consistently fail to make payments on their federal college loans.

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Tax income losses from foreclosed homes affect Californians in unexpected ways ? ForeclosureConnections

Thirty thousand Californian homes are moving through the foreclosure pipeline.

Property taxes plummet in the process.

City officials and schools are the latest victims of the blight.

Beyond the shame of tens of thousands of foreclosed, abandoned, shuttered homes in East Bay, and elsewhere in the State of California, lies a second blight – year upon year of property tax income that is supposed to be funding the cities, schools and other infrastructure on which Californians depend is vanishing in the shifting sands of economic drought.
For individuals, the end of the beginning of the foreclosure road is when the sheriff put them on the street – the work of government officials begins then, as they make difficult budget cuts, lay off staff and otherwise bite the bullet until the foreclosed properties are back in private hands again. Some of them may find themselves personally affected by the cuts they have to recommend.
In the East Bay area alone, banks and other lenders own over 10,000 foreclosed homes, with just a pittance up for sale in these price-depressing times – and a further 20,000 in the pipeline heading the same way.
“There is no question government services at all levels are going to suffer because of this,” said Contra Costa County Assessor Gus Kramer. “It’s just one of the trappings of the economy we’re in.”
You can almost feel the pain. Concord City has put off a quarter of its workforce. Antioch has shelved a quarter of its annual budget. Hayward has levied further taxes to avert redundancies. The effect will be more dispersed in schools – they depend on a combination of state income sources, and this will take a while to filter through.
A representative of the California Department of Finance admits that they failed to account for the foreclosure trend when they prepared their current budget, because nobody thought about it at the time. Current thinking is that State property taxes will fall 4.1% in the current period, and another 3.1% in the following year, both up on previous estimates. The biggest driver is the fall in property prices. This April the median buyer in Bay Area paid just 0,000 compared to the 2007 peak when 5,000 was the number that applied. Elsewhere, in areas like East Contra Costa County the drop is worse and approaching 65% in some places.
Many analysts are predicting a fresh tsunami as interest rates start rising. The situation a year ago could be repeated, affecting both economy and housing market, and stretching recovery further out. Most cities will be affected to some extent meaning that the losses will be spread throughout California.