Analysis of Student Default Rates at 7800 Postsecondary Schools

i Briefing Report to Congressional Requesters Default Rates at 7,800 : Postsecondary Schools ‘y l (?.’ :.-, i ; ! I United States General Accounting Office GAO Washington, D.C. 20548 Human Resources Division B-204708 July 5, 1989 The Honorable Claiborne Pell Chairman, Subcommittee on Education, Arts, and the Humanities Committee on Labor and Human Resources United States Senate The Honorable Pat Williams Chairman, Subcommittee on Postsecondary Education Committee on Education and Labor House of Representatives The Honorable E. Thomas Coleman Ranking Minority Member, Subcommittee on Postsecondary Education Committee on Education and Labor House of Representatives In September 1988, we met with staff members of your respective offices. We discussed the preliminary results of our analysis of school default rates for institutions participating in the Stafford Student Loan Program.’ You had requested information on which schools might be affected by proposed legislative changes that would have established school default rate thresholds and required that schools exceeding these thresholds prepare default management plans and agreements to reduce their defaults. Such proposals were included in Senate bill 2647 and House bill 4986. Subsequently, we provided each of your offices with a listing of schools that might have been affected by the proposed legislative criteria. We included information for each school on its (1) default rate, (2) the number of borrowers in default, and (3) the total dollar value of loans in default. We developed this information using the Department of Educa- tion’s latest cumulative computerized data base on the status of student loans made through September 30, 1987. The list we previously provided the Senate subcommittee staff contained about 750 schools having a 25-percent or higher default rate. We also provided the House subcommittee staff a list of approximately 1,300 schools having a default rate of 12-percent or higher. Each school on both lists had a minimum of 100 ‘We defined the school default rate as cumulative loans disbursed to defaulters attending that school divided by the cumulative loans disbursed to all borrowers who attended that school. Page 1 GAO/HRD-f49453BR Analysis of Student Default Rates B-204708 borrowers who had their last loan guaranteed in 1983 and who subsequently defaulted by September 30, 1987. This report builds on the information we previously provided and pre- sents a summary analysis of the approximately 1.2 million 1983 borrowers’ rates of default by the (1) kinds of schools attended (public, private, or proprietary) and (2) length in years of their schools’ academic programs. We categorized these borrowers into school groups using additional information provided to us by the Department, which is unavailable from the computerized data base. (See pp. 9-13 for a detailed explanation of our objective, scope, and methodology.) Also included, as requested by your offices, is a list of all of the approximately 7,800 schools and their students’ rates of default (see app. I), which we used in performing this analysis. Appendix I ranks each school in descending order by its students’ rate of default. For this report, we categorized the schools that borrowers attended into Analysis of the Kind five groups based on the kind of school attended and their typical aca- of Schools mr~I nar; ’ demic programs’ length: 2-years or less (public), 2-years or less (pri- Borrowers and vate), 4-years or more (public), 4-years or more (private), and Defaulters Attended proprietary schools. Examples of what we found included the following. Four-year public and private school borrowers had the lowest percentage of loans in default (10 percent each) and 2-year public and proprietary school borrowers had the highest percentage of loans in default (25 and 39 percent, respectively). (See p. 15.) l Four-year private and public school students had the lowest percentage of dollars in default (8 and 9 percent, respectively) and 2-year public and proprietary school students had the highest percentage of dollars in default (21 and 34 percent, respectively). (See p. 18.) Analysis of Borrower Appendix I lists the schools included in our analysis. After providing your offices with preliminary information in September 1988, we agreed Default Rates at Each to provide for each school its (1) name and location! (2) borrowers’ rate School of default in descending order, (3) dollar amount of loans in default, and (4) number of defaulters. We also agreed to list all schools in our universe having at least one borrower. Consequently, it should be noted that for these statistics to be Page 2 GAO ‘HRD8863BR Analysis of Student Default Rates B-204708 useful, schools with high rates of defaults among their students must also have some minimal threshold of student-borrowers before their rates can be considered meaningful. Relatedly, default management efforts by the Department, guaranty agencies, or the schools themselves could be expected to yield greater default reduction improvements for schools with both relatively high rates of defaults among their students and significant numbers of defaulters than for schools with fewer defaulters. Appendix I shows school default rates for borrowers who had their last loan guaranteed in 1983. Our analysis showed that over 1,200 schools had default rates greater than 40 percent. (See page 20.) However, about half of those schools having a student default rate greater than 40 percent also had less than 25 defaulters. (See p. 21.) We believe these default statistics give a reasonable measure of the com- parative default experiences of students at various schools while avoid- ing an important possibility of bias in default rates calculated on a single year’s data. This bias could occur if, for example, borrowers from one kind of school default more quickly or more slowly after they leave school than do those at other schools. The accuracy of the Department’s data base may also affect the preci- sion of the default rates shown, but the information we have developed should give the Congress an idea of which schools could be more closely monitored based on their students’ default rates. Additional information-which is unavailable in this data base-could be used to analyze and explain default rate differences among various subgroups of borrowers. Such information includes (1) whether students are admitted on their “ability-to-benefit” (as defined by schools in accordance with the Department’s regulations) as opposed to a high school diploma or its equivalent and (2) students’ employment status. These factors could be taken into account in setting goals for any school- specific default management plans. However, such considerations were beyond the scope of this effort. In conducting our analysis we found instances in which the data base Information on Some showed where students attended schools that (1) were never eligible for Schools Needs the program, (2) had ceased operations or were terminated from the Follow Up program before 1983, or (3) had an invalid identification number so that we were unable to determine the school’s name and address (these Page 3 GAO/HRD-8983BR Analysis of Student Default Rates 5204708 schools’ names and addresses are shown as unknown in app. I). Depart- ment of Education officials have helped us throughout this analysis in our efforts to purge the data base of incomplete records. And we have agreed to provide them with a detailed listing of the students who attended these schools so that the Department can follow up with the appropriate guaranty agencies to correct entries in its data base and determine whether fraud was involved in any of these instances. This information will be provided separately to the Department. As agreed with your offices, we did not obtain formal agency comments. We did, however, discuss the contents of this report with Department of Education program officials and they believed that we had properly noted any potential data limitations. We are sending copies of this report to other congressional committees, the Department of Education, and other interested parties. Should you wish to discuss the information provided, please call me on 275-5365. The major contributors to this report are listed in appendix II. William J. Gainer Director of Education and Employment Issues Page 4 GAOiHRD-89-63BR Analysis of Student Default Rates Page 5 GAO/HRtM9&3BR Analysis of Student Default Rates Contents Letter 1 Guaranteed Student 8 Loans: Analysis of Background 8 Objective, Scope, and Methodology 9 Student Default Rates Kinds of Schools That Borrowers and Defaulters 13 at 7,800 Attended Postsecondary Schools Borrower Default Rates for Each School 19 Appendix I School Default Rates for 1983 Borrowers Appendix II 222 Major Contributors to This Report Related GAO Products 224 Figures Figure 1: Proposals Initiated to Address Default Issues 8 Figure 2: Kinds of Schools Borrowers Attended 11 Figure 3: More Borrowers Attended 4-Year Public Schools 14 Figure 4: Borrowers at 4-Year Schools Defaulted Less 15 Often Figure 5: Percent Distribution of Borrowers and 16 Defaulters Figure 6: 4-Year Public School Students Received More 17 Loan Dollars Figure 7: Lower Dollar Default Rates for Borrowers at 4- 18 Year Schools Figure 8: Percent Distribution of Loan Dollars Received 19 and Defaulted Figure 9: Many Schools Had High Default Rates 20 Figure 10: Many With High Default Rates Had Less Than 21 25 Defaulters Page 6 GAO/~8963BR Analysis of Student Default Rates Page 7 GAO/HRDNMMBR Anrlyria of Student Default Rates Guaranteed Student Loans: Analysis of Student Default Rates at 7,800 Postsecondary Schools Cumulative loans guaranteed from the inception of the Stafford Student Background Loan Program in 1965 have totaled over $89 billion through fiscal year 1988, with the loan volume’ more than doubling since 1983.

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