For Profit College, Student Loan Default, And The Economic Impact Of Student Loans

For Profit Goes on Probation

The University of Phoenix has been placed on probation by the Department of Defense preventing the university from recruiting on military bases. The probation comes after the Federal Trade Commission and the California Attorney General’s investigation into the University of Phoenix recruiting methods, its high costs, and the resulting poor student performance.

This is not the first time Phoenix-U has been in trouble. In 2013 the University of Phoenix was threatened with probation by the accreditation board for a lack of “‘autonomy’ from its corporate parent -– a development that prevented the university from achieving its ‘mission and successful operation.’” In other words, the for-profit university #1 priority by its owners was to turn a profit at the expense of teaching, retaining, and graduating its students. This is precisely what I had alluded to previously on higher rates of defaults.

Student Loan Defaults

An interesting analysis by the NY Fed suggests students with lower amounts of student loan debt are more likely to default than those students with higher amounts. This is a new take on student loan debt and associated default as it was always thought the higher the debt the greater risk of default. Student Loan Debt has increased as more attend college, costs to attain an undergraduate degree have increased, even higher costs are sustained for Masters and Doctorate degrees, and students have been staying in school longer. Coming out of college the study finds amongst students loan debt is distributed rather evenly over time with one third being held by those in the 20s, one third held by those in the thirties, and one third held by those forty years of age and older. A large percentage of those borrowers or ~39% of them have loans of less than $10,000 and it is the holders of debt who have been defaulting at a higher percentage. The study goes on to break it down as to why they might be defaulting more frequently than tose with higher amounts of debt.

Using Equifax credit data, the NY Fed broke down the data into loan origination cohorts of student loan borrowers and using the same Equifax data, developed default rates for each cohort. Taking the origination date information for each academic year, the Fed was able to assign borrowers to loan-origination-completion-cohorts. The analysis did not reveal dropout or graduation information; however by using loan origination data, the methodology used does approximate whether students left school finished their education or just left school.

As shown on the graph and nine years out for the 2005 and the 2007 cohorts 24% of the students and greater had defaulted on their student loans by the 4th quarter of 2014. While the data for the 2009 cohort is incomplete and depicts five years as opposed to nine years, the data depicts a worsening default rate at 5 years then what can be found with the 2005 and 2007 cohorts at 9 years. Typically what we read and hear about is a 3-year window as reported by the Department of Education and is discussed by the news media. The 3-year window default rate is much less for each of the cohorts with the 2005 cohort being ~1/2 or 13% of what it is in 2014 as shown by the Fed study.