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Chased Away From Student Loans -- Some More Digging

May 2, 2008
On April 17, I checked my inbox and found a message from a reader who had read the previous day's column on the JP Morgan/Chase decision to discontinue lending to schools with historically low repayment rates.

I had pointed out that Chase's spokesperson refused to list the affected schools, but that borrowers deserved to know. I also added that such information would end up becoming public anyway, as unhappy borrowers would eventually post it on the Internet. Finally, I stated that the government should provide borrowers, educators and lenders with a list of schools that have below average default rates.

This morning, the reader told me that the U.S Department of Education (DOE) already publishes such a list and it is available to the public. So, I went to their site to take a look. One thing I learned was that you needed to know their terminology in order to find the list. It took some digging to find.

I appreciate the reader pointing this out, because I learned more than I expected. The DOE tracks cohort default rates. A cohort default rate, according to a PDF guide posted on the site, is based on a fraction: the number of borrowers who have defaulted on students over the past two fiscal years divided by the number of borrowers who begin to repay their loans over the past fiscal year. A cohort year is the same as a federal fiscal year, October 1 through September 30.

According to the DOE, A school is subject to sanctions, meaning the loss of Federal Family Education Loan (FFEL), Federal Direct Loan (DL), and/or Federal Pell Grant Program eligibility if the school has three consecutive official cohort default rates that are 25 percent or greater. Also, a school is subject to the loss of FFEL and DL Program eligibility if the school has an official cohort default rate that is greater than 40 percent for the most recent cohort year. The Web site also reported that no school had fallen under these sanctions since FY 2005.

And there is some good news: the national cohort default rate has dropped from a high of 22.4% in 1990 to 4.6 percent in 2005, the last year that the DOE has available data. Cohort default rates ranged from 4.5 percent to 5.4 percent between 2001 and 2005. That means that someone has done a better job of collecting the money from borrowers.

While I can't draw firm conclusions from limited research, I have to believe that private lenders use their own methodology to decide who qualifies for a student loan, as well as the DOE statistics. A 4.6 percent default rate, along with government guarantees and subsidies suggests that student loans are not a risky business, though it is possible collection expenses and subsidized origination fees -- charged to students in direct lending - cut into their profits. Even then, some lenders chose to make gifts to financial aid officers to direct students their way. I'd have to guess that the profitability of student loans for the gift-giving lenders depended on receiving preferential treatment.

But my digging takes me back to my original question: how does Chase, or any other lender, choose the "haves" and "have nots?"

According to the DOE Web site, for example, Historically Black Colleges and Universities (HBCUs), Tribally Controlled Community Colleges (TCCs), and Navajo Community Colleges, as defined by statute, have been eligible for relief from the consequences of cohort default rates. As of September 2007, all 98 eligible HBCUs had official FY 2005 cohort default rates that fell below regulatory thresholds. No HBCUs are subject to cohort default rate sanctions.

While the federal government has provided relief, I must ask another question: How have the banks treated borrowers from these schools and others? I welcome any reader to answer.

(Originally published at Educated Quest blog and reprinted with permission of the author, Stuart Nachbar).
About the Author
Stuart Nachbar has been involved with education politics, policy and technology as a student, urban planner, government affairs manager, software executive, and now as author of The Sex Ed Chronicles. Visit his blog, Educated Quest.
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