Low Student Loan Repayment Rates Put Hundreds of Colleges at Risk of Losing Federal Aid
Credit: Kevin Carter / Getty Images News / Getty Images- Colleges can lose access to federal financial aid if former students default on student loans.
- Early indicators show many borrowers are struggling to stay current on their student debt.
- This puts over 1,000 schools at risk of failing the cohort default rate.
- Experts pumped the brakes on panic, however, citing a long timeline before defaults become a serious issue
Low student loan repayment rates could spell trouble for colleges and universities across the U.S.
More than 1,000 institutions have a loan repayment rate below 70%, according to an analysis of federal data from the American Enterprise Institute (AEI). This puts these institutions in danger of failing the cohort default rate, a measure that could see schools lose the ability to disburse federal financial aid — including federal student loans and Pell Grants — to college students.
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The majority of schools at risk of failing the cohort default rate are for-profit colleges and universities.
What Is the Cohort Default Rate?
The cohort default rate is an attempt to evaluate institutional quality.
Graduating cohorts from a college or university should be able to consistently repay any federal student loan debt they incurred to attend that school. If nonrepayment rates are between 30-39% over a three-year period, that institution fails the metric, and its students lose access to federal financial aid. If nonrepayment rates are 40% or above for even a single year, the school immediately loses access to federal funds.
Preston Cooper, senior fellow at AEI and author of the report, told BestColleges that the cohort default rate hasn’t been a major concern for institutions over the past two decades. However, the return to loan repayment and the end of the one-year on-ramp period could see a spike in defaults.
“There is a chance that this is going to come back with a vengeance,” Cooper said.
Cause for Alarm?
Still, it’s worth distinguishing the cohort default rate from the nonrepayment rates recently released by the Department of Education (ED).
To default on a student loan, a borrower must miss payments for 270 days, explained Karen McCarthy, vice president of public policy and federal relations at the National Association of Student Financial Aid Administrators (NASFAA). The nonrepayment rate, meanwhile, only counts borrowers who entered repayment since 2020 and are more than 90 days delinquent on their loans.
The two rates are correlated but not an exact match, McCarthy told BestColleges.
“There’s not a direct tie,” she said, “but it is an indicator.”
Still, that’s not to say that colleges and universities aren’t concerned about the high rates of nonrepayment, McCarthy said. The high rate could be a precursor to student loan defaults, plus it looks poorly on an institution if such a high percentage of former students are struggling to pay back their federal student loan debt.
There’s another reason for institutions not to be overly concerned just yet.
Cooper explained that we likely won’t see cohort default rates dip into the problem ranges until ED releases data in September 2027. That’s because, over the next two years, the cohort default rate will still be anchored by the pause in loan repayment caused by the COVID-19 pandemic.
Additionally, institutions can appeal a judgment that they failed the cohort default rate, he said.
Just 12 schools failed the cohort default rate in 2019, Cooper said. Ten of those 12 institutions successfully appealed that determination, which let them retain access to federal financial aid.
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Institutions can request an appeal if they can prove there were “exceptional mitigating circumstances.”
One example of an appeal is the “economically disadvantaged appeal,” where a school alleges that it shouldn’t lose access to federal funds because it enrolls a high number of low-income students and has a sufficient completion rate.
“To be honest,” Cooper said, “I think a lot of schools will successfully appeal.”
Looking Ahead
Institutions and ED will have a hand in whether the cohort default rate will become a major issue in two years.
| Institution | Institution Type | State | Nonrepayment Rate |
|---|---|---|---|
| B-Unique Beauty & Barber Academy | Private, for-profit | South Carolina | 60% |
| Adrian H. Wallace Barber Academy | Private, for-profit | Florida | 60% |
| CDE Career Institute | Private, for-profit | Pennsylvania | 60% |
| Texas Barber College | Private, for-profit | Texas | 60% |
| Professional Career Training Institute | Private, for-profit | Texas | 61% |
| Carolina Christian College | Private, nonprofit | North Carolina | 61% |
| Trend Barber College | Private, for-profit | Texas | 61% |
| GoodFellas Barber College | Private, for-profit | Arkansas | 62% |
| Larry’s Barber College | Private, for-profit | Illinois | 63% |
| Legends Barber College | Private, for-profit | Texas | 64% |
| Webb’s Barber School of Arts | Private, for-profit | Georgia | 64% |
| Foster’s Cosmetology and Barber College | Private, for-profit | Mississippi | 64% |
| Ray J’s College of Hair | Private, for-profit | Louisiana | 64% |
| Moore Career College | Private, for-profit | Louisiana | 65% |
| Barber Institute of Texas | Private, for-profit | Texas | 66% |
| Washington Barber College | Private, for-profit | Arkansas | 67% |
| Networks Barber College | Private, for-profit | Illinois | 67% |
| Houston School of Carpentry | Private, for-profit | Texas | 67% |
| K&G 5 Star Barber College | Private, for-profit | Texas | 74% |
| Construction Training Center | Private, for-profit | South Carolina | 82% |
McCarthy of NASFAA said one major pain point could be the rollout of a new income-driven repayment (IDR) plan.
The recently passed One Big Beautiful Bill removes access to many of the existing IDR plans and replaces them with a new Repayment Assistance Plan. Additionally, the bill and recent court cases erased the Biden-era Saving on a Valuable Education (SAVE) plan.
Meanwhile, as of July 31, nearly 1.4 million IDR applications remain in ED’s processing queue, according to a recent court filing.
“All of that, if not handled well by the department, has the potential to cause chaos among borrowers,” McCarthy said.
ED called directly upon institutions to reach out to borrowers and encourage former students to become current on their student loan payments. In an electronic announcement, the department encouraged colleges and universities to provide direct outreach to borrowers who graduated or stopped attending the institution since January 2020.
Cooper anticipates some institutions will hire default management companies to track down borrowers and explain repayment options.
“The return to repayment needs to be an all-hands-on-deck effort,” he said.