What Student Loan Default Rates Really Mean

This is Future youe with Jeff Salingo and Michael Horn.

And welcome to Future youe. I'm Michael Horn, not joined at the moment by my colleague Jeff Salingo. He's out on assignment for his latest book, but he'll be with us a little bit later in this episode. But really excited for this episode and the conversation we're about to have with Jason delisle, a resident fellow at American Enterprise Institute, a staple in the Washington, D.C. area. And Jason has really carved out a strong voice over the last couple years there on thinking about higher education, financing student loans, and other topics that are of hot debate in the media and actually get airtime across a lot of platforms. And Jason, welcome to Future you.

Thanks for having me.

So I want to start with how you got into this crazy space of higher education. You worked on Capitol Hill. You had an expert in budgeting, I believe, but that doesn't necessarily cry out higher education. So how did you sort of get into this world to begin with?

Yeah, I mean, it started with just a general interest in public policy. That's how I ended up working on Capitol Hill. And I was working for Congressman Tom Petri, who was very senior on the Education Committee, and he had this interest in student loans, and I was working on education for him. And so I ended up sort of taking on this student loan portfolio. And what I noticed right away was you go into these meetings, and it was all of these staff who were education people, and they, they knew about vouchers for K12 education, and they knew about no Child Left behind and special education. And then the topic of student loans would come up and they just, they were kind of lost. And I would really sort of watch the student loan companies come in then and just sort of run roughshod over them.

Interesting.

And I thought, hey, here's an opportunity. I'm interested in this topic, and here's a place where I think there's room for a lot more thinking.

So you've delved into that deeply then, over the last several years, first at New America foundation after you left Capitol Hill, and then with aei. And you've written recently a lot about how we think about student loan default rates and that conversation, because we hear a lot about that in the news, and it's often a way to judge programs. And I'd love it if you just step back and break down when a student goes into default on their loans. What does that actually mean? And what do we know about what happens to them afterward?

Yeah.

So defaulting on a loan is not making payments. And in very technical terms, the federal government, these are on federal student loans, it's not making a payment for something like 270 days. And so you've gone a long time without making an on time payment. And at that point or a little bit thereafter, a bunch of things start to kick in.

Right.

Where the Department of Education takes the loan and they assign it to a collection agency that tries to recover the money from you. But it turns out that this is just sort of described in the media and even among policymakers as this sort of catastrophic terminal status of the loan. But what we looked at is we wanted to figure out, well, it's a government program, so there's a bunch of policies and there's a bunch of things that are supposed to happen after somebody defaults. And what are those and what do they look like? So we got our hands on some data to do that. We also did a lot of interviews. And it turns out that a large share of the loans after they default end up being repaid.

Like what percentage?

Yeah, something about within a few years after default, within about five years after the default point, about 30% are fully paid off.

Wow.

Yeah. And so one of the things here is that what people sort of come to realize, at least in the policy world over the past few years, is that the defaults on federal student loans are actually relatively low balances, 3,000, 4,000, $5,000. And so then you can start to sort of see how, oh, well, I can see how somebody then could go on to pay that after defaulting. And that is what we see now. It's not exactly. It's not always a pretty sort of repayment process at that point.

Right.

The federal government can have your wages garnished and they'll seize your tax refund if you're in default on your loan. But when they're doing those two things we see in the data, it looks like that people are sort of paying down these loans fairly quickly after they've defaulted.

And did you do interviews with actual students in those circumstances to figure out what their impact on their lives might be during that?

Yeah, we didn't. I've done. And actually sort of the idea for this work came out of some focus group work that I did when I was at New America in 2015 in a paper called why Student Loans Are Different. We went around the country and hired a firm to do focus groups where we asked this sort of thing, like, what is it like to default on your loan? And why aren't you paying and so this sort of motivated it where what we were hearing from people was just a lot of different kinds of descriptions. It wasn't necessarily the sort of catastrophic kinds of life events that we sometimes associate with a student loan default.

So is there a better way to think about policy than in terms of judging whether a program, let's turn down to the higher education programs, is, is a good program or not? Because right now the storyline is often, well, that's a, often it's a for profit university in the storyline and they have such and such default rate, therefore it must be a bad program. Is there a better way to think about from a policy perspective and measures perspective whether a program is good or bad?

Yeah, I mean, I think why we've really focused on loans as the sort of proxy for quality and affordability is because it's also, I mean, it is a proxy for those things, but it's not exactly those things. Right. And what we really are after in the sort of using loans as default is we want to know how much did you pay and how much are you earning and do those things work out? Are you earning enough to justify what you paid for? The education and the loan is sort of absent. That information, which is actually until fairly recently, which is an interesting story, has been absent. And so when policymakers in the early 90s said, well, we need some measure, I said, well, why don't we look at loans? That's the closest we can get to how much did you pay?

How much are you tell our audience why, that was the closest that they could get at that time.

So it's the closest they could get. Just really the idea and the practicality of collecting information on what students were paying and what they were earning for various programs and credentials was just sort of, you know, really not anything somebody could have thought of to do at that time. It wasn't really on anybody's radar screen. And I don't even know if practically speaking, it could have been done in anything like, you know, in a timely manner.

Interesting. So stepping back, it sounds like from your perspective, better measures would be everything from return on investment. Is your salary such pre and post that it justifies whatever the cost of the program was. And secondly, dollars paid down over the life of the loan. Is that, is that an accurate reflection of where you are?

I mean, it is, but also like, you know, in part of this discussion, right, the loan, like we all, we just sort of reach for the loan as the way to measure the thing.

Right?

Yeah.

What's amazing though is that Most of the money is in grants. And that's just sort of nobody. It's interesting, right? Like nobody from a policy point. So we're talking about like protecting taxpayers. That's some of the motivation here.

Right.

Some of it's protecting consumers, some of it's protecting taxpayers. It's sometimes very slippery, which one it is we're doing.

Sure.

But you know, if we're protecting taxpayers and also to a certain extent, consumers, I was like, we should care about grants too. But then I sort of say, well then really. But let's just call it what it is, which is how much did you pay and how much did somebody else pay in that case? And so I think that's what we're looking for. And I think loans have been this, just this. They started out as a proxy and they've become the thing just because they've been part of the policy and the conversation for so long. And I really think we do need to get away from that.

Yeah, no, that's helpful. So let's start to segue on that conversation because you've written a lot about how high default rates don't and sort of these other more comprehensive measures don't just affect for profit institutions. Public community colleges and things like that are equally, if not in some cases, more guilty of these sorts of things as well. How do we, how do you start to enlarge that conversation then and think about how we should judge these rates, if you will?

Yeah, I mean, I mean, this is one of the things I sort of noticed in watching this debate around. You know what I sort of call the, like the accountability transparency agenda in higher ed, especially in federal higher ed. And it's very, the agenda is sort of, if it were a person, it would be very coy about low and bad performance on loans at community colleges.

Right.

It just sort of look the other way or maybe blush a little bit. Right. And I think that's, you know, but what we're seeing, you know, when we look at the data and we try to sort of expose this, is that the loan repayment rates at, at community colleges or even open enrollment public universities

like UMUC in Maryland.

That's right. And even in graduate schools, the loan repayment rates and the default rates look quite similar if you're comparing apples to apples with for profit colleges. The difference though is that the

share

of the students who are taking out loans is lower at community colleges. And people will sort of reflexively point this out. Whenever I make this, when I ever make this argument, they say, oh, Well, a smaller share of students borrow there. To which I always say, well, so what?

Fair enough. So is the other part of your argument that they also are getting a lot more subsidy, whereas the for profits are not? Is that where you're going on some of this and thinking about the roi, not just to the individual, but to society?

Well, I mean, there's.

Yeah.

And I have sort of. I've done a paper on that, which we, which we call, which we titled Measuring Value or Measuring Subsidy, which is if you subsidize something enough to the consumer, it will look like. It'll look like a great deal.

Right.

Sort of the argument of, if you give me a big enough subsidy, I will put a windmill where there's no wind. You can sort of hide the fact that there's not a lot of value here by overly subsidizing it.

Right.

And that is one issue. But I think the more important issue with bringing in the public colleges and this sort of accountability and transparency conversation is that a bad student outcome is a bad student outcome. It doesn't matter where he went to school, it doesn't matter what percentage of students borrowed. Right. And also to the point, on loans, it doesn't matter if you use the government's money or used your own.

Right.

I mean, if we really care about problematic student outcomes and low return on investment, then we want to see all that. Right.

So how would you start from a practical perspective of putting that regulation in action? Because one of the natural reactions, I think is, sure, you may be right, Jason, but for Profits have less lobbying power and political power on Capitol Hill, so it's easier to put a regulation like gainful employment on them. And then if it works really well, yeah, we can have that larger conversation down the road. How would you go about this?

Yeah. So, I mean, I think what we should start with, and I'm not sure that, you know, I'm not sure that the regulatory route will sort of bear the fruits that everybody thinks it does. But I think, you know, and may have lots of unintended consequences. But the. Which I can go into. But the, you know, I think what we should start with, which we really haven't done fully yet, is, you know, decide sort of disclose this information, do a better job of disclosing this information, making it available for people who want to use it.

Right.

So, and this information, I mean, what are you paying and what are you earning?

Right.

This is really kind of what we're getting at. And to a large extent, this information is missing, not completely, but it's missing.

Right.

So it's missing at the program level. We can get it for, for an

institution through the college scorecard, basically.

Yeah, through the college scorecard. We can't get it for graduate schools.

Right, right.

We can't get it for undergraduate. We can't get it at the program level, which matters a lot. We also can't get it for people who don't receive federal student aid because it's this sort of like, this is supposed to be this taxpayer investment issue, although it's consumer protection, which is, again, this is my point about this is

sort of slippery, sort of muddled.

It's very slippery. So I think that the sort of making this information available, more available, I think is a route to pursue more aggressively and with sort of drawing the line of, well, then what should the government do with the information? And I'm not sure that that's the right. That's necessarily the right approach that the government should then do something with this information. Because I think it leads to things like making lots of difficult judgment calls about what these things should be worth and what they're not worth. I'm all for having a sort of like floor for value.

Right.

And sort of consumer protection. But I see this sort of slippery slope of, well, you know, a master's of social work, it's very expensive, has very low earnings, is that a low

societal value might be high. And so should we be thinking about, should we be judging that?

That's right. And so, you know, and what I see there, right, is that actually, you know, the whole sort of accountability, transparency debate has really been one framed of where people on the sort of political left are for this, they're the champions of this. And people on the political right are sort of conflicted and divided and sort of defensive. But really this argument I just made about the masters of social work, it isn't going to be the people on the right, political right, saying we're stepping up for that.

That's right.

It'll be people generally on the left and they'll be saying, oh, we have to have exemptions and carve outs. And I have a different assessment of what's worth it and what's not right. There's actually a really interesting story on the very original gainful employment regulation proposal. The first rule that the Obama administration codified and put out there, they actually exempted any borrower making progress towards the public Service Loan forgiveness program from the accountability regime. This is sort of buried in there. And this is what you see the more you look at these sort of rules and regulations. And so what you see is the people who are talking the toughest about it are also people who have lots of carve outs and exemptions and sort of almost gimmicks baked into these policies.

Interesting. So, last question on our end as we start to conclude our time with you, which I want to turn to something that has been controversial, I think that you've written a lot about, which is that you've said state budget cuts, a lot of people say, as the state has retreated from financing public higher education, in effect, that has caused the tuition increases that we've seen over the last couple decades. And you've pushed back on that. Yeah. You wrote an article recently about the Federal Reserve bank of Boston, I think, showing that for every dollar that was cut, tuition rose 17 cents. So not quite explanatory of everything going on and that even in times of the last several years where states have actually been getting back into the higher ed financing game, to some measure, tuition hasn't slowed. So I'd love you to break. So I think that's your evidence. I'd love you to break down the debate, though, a little bit. And isn't it possible that it's part of the story though, even if it's not the whole story?

Yeah, it's definitely part of the story. And really the argument that we were trying to make and sort of push on this is that how much of the story is it?

Right.

And it sort of seemed like, you know, for all the sort of the academics and the research and the studies in higher education and so much rigor being brought to bear and so much robust debate. Right. And then that this issue just sort of sat there and nobody really questioned it. And you know, then there wasn't. But there was actually a little bit of research there suggesting that the relationship between state funding for tuition subsidies and changes in tuition is not one for one like many people sort of have us believe. They said this is the leading cause of increases of public interest.

What do you see the leading cause as?

Well, I wouldn't necessarily know exactly. I don't think you can sort of pin it on one thing. But look, so here are some explanations why it might not be the one for one relationship that everybody thinks. So to your point, if appropriations and funding goes up and tuition still goes up, well, just mathematically now, the relationship doesn't look very strong. Really what this starts to expose is that maybe universities set their prices regardless of how much they get. And so maybe they're trying to get prices that they think the market will bear and maybe they're going to increase spending and then increase prices regardless of how much subsidy they get. So it's sort of this loose transmission mechanism and we wanted people to at least be aware of that.

Appreciate you shining light leading the conversation to really debate these issues in a very transparent, honest way. And thanks for joining us on Future youe.

Thanks.

And we'll be right back.

This episode of Future youe was made possible with support from the Academy for Innovative Higher Education Leadership. The Academy is a partnership between Arizona State University and Georgetown University and is the premier training ground for those who aspire to senior leadership positions in higher education and those who want to lead organizational change at colleges and universities in the future. This episode was also made possible with support from Entangled Solutions. If you want to shape the future of education, Entangled Solutions would like to hear from you. Entangled Solutions is hiring smart, mission driven team members interested in helping world class institutions solve their most vexing challenges in learning and education. Learn more at Entangled Solutions.

And welcome back to Future you. I'm Michael Horn and now joined by the Jeff Salingo, back from reporting on your forthcoming book on the college admissions process. Welcome, Jeff.

Thank you. I was visiting some high school students this morning while you were interviewing Jason. So sorry to have missed that, but it's great to be back here.

No worries. Jason and I had a very wonky but important conversation, I would say, on a number of topics around student financing and higher education financing. And the one that I thought we'd start with was we talked a lot about how he said default rates are what we default to as the measure of success for particularly for say, for profit programs and things like that. But that he thinks a better measure is looking at really return on investment. And it seems like default rates suffer from a number of limitations. And you've been covering this industry for four years. How do you think about that tension? And when you were a reporter thinking about quality and so forth, how did you report out on default rates?

And I mean, it's a tough one, as you say. It's, it's the best piece of data we had for a long time. But default rates only measure a moment in time, right? Right after graduation while students are in repayment mode. There's a lot of ways that colleges particularly can manage defaults to keep their default rates down. And there's been a lot of reporting on that. And finally, it affects only people who take on loans. So those tend to be institutions where a lot of more lower income students enroll. So I don't think it's a great measure. We now have better measures. And in more than a dozen states, we're starting to track through unemployment insurance information, we're starting to track. And we're able to track how much students make based on program, and then we could track it back to program and institution. So we are starting to have better measures of labor market outcomes, which I think is a much better measure of roi. I mean, it's clear that ROI is here. I think when this whole discussion started, probably five, six years ago, there was a big pushback from higher education. We shouldn't measure degrees by roi. But I think most academics have come to the conclusion that given their rising cost of college, that this is here to stay. And the fact, and we mentioned this on one of the earlier shows in this new season, Michael, given your book, is that most students now go to college to get a better job, whether they're 18 years old or whether they're 50 years old. This has to be a way to measure this. And default rates, I don't think, work anymore.

Yeah. And my take on it was, of course, from an entangled perspective where we helped develop the Education Quality Assurance Standards Board, and we came up with standards around learning outcomes, how you measure completion rates, how you measure placement rates into jobs or further higher education, how you measure return on investment. So the salary growth over the cost of the program, both to the individual and society. So you look at both of those and then thinking about learner satisfaction after they've left the program, not a net promoter score, which I think is a little empty.

Yeah.

But all this, of course, requires data. Right. And so one of the reasons we don't have this at the federal level is because in a previous iteration of the Higher Education act, the.

Yeah.

The national association of Independent Colleges, the private colleges, really fought the idea of a student unit record, which would enable us to follow students after graduation and know what their labor market outcomes are. But we now have better data on this thanks to the College Scorecard. We know a little bit about labor market outcomes of students and what they're making. And there was an announcement recently at an Education Writers association where Mark Schneider, who does statistics for the government, and Diane Auer Jones, both, who's with the Education Department, both mentioned that the next iteration of the college Scorecard are going to include certificates as well as master's and professional degrees in terms of their market outcomes. Right. So it's not only people who are pursuing associate degrees or Bachelor's degrees, but also people now at these other ends of the spectrum in higher education who can look at what is my ROI of this program.

And so they're getting closer to the individual program level, but it'll still be aggregated by degree. It sounds like.

It does sound like that. They didn't have much information on this, but it did sound like this. But I guess the other question then is, and I think Jason talked about this during the conversation, is that, will students use this?

Yeah. And, you know, Jason's clear perspective was government beware, do not regulate befitting someone. You know, that there will be unintended consequences, which I thought he raised some good points about that we might not choose to invest in a social work program because of the ROI in terms of what we pay social workers, but the societal impact may still actually be very important, and we want to subsidize those sorts of programs. And so how far down the road do we go? What.

Which is an academic, which has been, you know, the argument of many academics.

And what I didn't push him on, but I'd love your take on, is that from my read, just data transparency on its own doesn't necessarily work. And we've seen a lot of evidence that maybe it helps the most advantaged students that have the capacity to absorb and assimilate that information and make decisions. But those disadvantaged students that need that information to figure out roi, am I likely to get placed, et cetera, tend not to take advantage of those data sources when they are out there. So what do we do about that?

This is so true. I mean, one of the biggest early takeaways from my book research, and it's not that surprising, is what I would call the unevenness of the college search process. Largely based on income. Right? So if you come from a higher income household, you're more likely to, for example, to go to a better public school. Sometimes you go to a private school, you have access to better counselors. I met students who already, quote, unquote, workshopped their college essays over the summer with professional writers. I mean, all this stuff, right? And. And meanwhile, you have other students who come back after Labor Day. They still really haven't thought about college. They can barely get 10 minutes with their counselor because their counselor is overworked. And so then we just say, okay, well, if we just throw more information at these students, they'll make better choices. And I actually think that, yes, we have more information than ever before thanks to the Internet, but we're now overwhelming students. And in Some cases it's helping students who already have advantages be able to sift through that information. So what I think, and we see this with the research, is that we can't overwhelm students with this information. We kind of have to give it to them at the moment they need it. And in short chunks, it's almost in ways about how we best learn as well. Right. Let's not overwhelm us with content, but tell us what we need to know when we need to know it. So for example, later this fall UCLA is going to be doing some experiments around texting as early as eighth grade. Now around college because as they point out, senior year is too late to start really thinking about college. Right. You have to take the right courses in high school and things like that. So they've been doing a lot of work in California, especially in, in low income and first generation high schools about getting the pathway right to college, but it hasn't quite worked still. But now let's meet students where they are and let's do it as short as something you can could fit into text. And the more I think we do this even around the ROI thing, give information shorter chunks when students need it in iterative and episodic standpoints over their time, I think it's going to be much more, it's going to show much more success.

That sounds like a good design principle for the neutral arbiter that I hope comes along and doles out that information. Not just the institutions, but it's I think a pretty big insight of small chunks to help people make better decisions. So fascinating conversation with Jason for the first half and always a fascinating conversation when you join us as well, Jeff. So for all those listening, thank you so much. And if you're listening on itunes or wherever you're listening, please rate us, subscribe, tell your friends and until next time, we'll see you on future you.