Beware – Colleges are ‘gaming’ student loan default rates to mislead future students & the DoE.

WASHINGTON — Colleges and universities are avoiding federal punishment for high student-loan default rates by hiring consultants who encourage borrowers to delay payments on their loans, even if that will cost them and taxpayers more in the long run, Congress’s nonpartisan watchdog found.

In a two-year examination of how colleges and universities manage graduates at risk for defaulting on their loans, the Government Accountability Office found that institutions hired consultants that pressured student borrowers to effectively put their loans on ice — or “in forbearance” — an option that allows borrowers to avoid default. It also allows colleges and universities to avoid losing federal funding because of excessive defaults.

The findings by the independent agency expose major problems in one of the few measurements of higher education value. The so-called cohort default rate, which accounts for borrowers who default on their loans within three years of graduating, is the only metric in the federal higher education law that quantifies whether colleges and universities are graduating students who can pay back their debts.

“What was clear to us is the current accountability measure is flawed because schools can game it, and they do so at the expense of their former students,” said Melissa Emrey-Arras, an education director at the G.A.O.

Auditors found that a majority of the consultants examined used “inaccurate and or incomplete information” and made unsolicited calls to exclusively promote the freezing of loans. One firm inaccurately told borrowers that they could lose access to federal support programs, like food stamps, if they defaulted on their loans. One firm even offered borrowers $25 gift cards to put their loans in forbearance.

The tactics are not illegal. But they shed light on how thousands of institutions have been gaming a little-known loophole in the federal accountability system to attest that taxpayers, who foot the bill for billions of dollars in student loans every year, are getting a return on their investment. Auditors reviewed a sample of nine default management consultants who served more than 1,300 schools and more than 1.5 million borrowers.

Mr. Itzkowitz, now a fellow at Third Way, a center-left think tank, said the report showed the cohort default rate was a “useless and toothless accountability measure.”

“In reality, having a low rate doesn’t mean that an institution is serving its students well,” he said.

The cohort default rate was written into law in the early 1990s amid concerns that colleges, mainly for-profit higher education institutions, were saddling students with debt and degrees with little value. Many experts and higher education leaders now acknowledge that it has outlived its usefulness.

The measure is a target in this year’s stalled effort by Congress to reauthorize the Higher Education Act. Senator Lamar Alexander of Tennessee, the chairman of the Senate Education Committee, “believes Congress can improve the way colleges and universities are held accountable,” a spokeswoman said. A reauthorization proposal from Mr. Alexander’s committee would shift to using the percentage of students actually repaying loans to measure the value of an institution’s degrees.

According to the G.A.O. report, the Education Department estimated that it would not recover more than 20 percent, or $4 billion, of defaulted loans. Based on the number of students turning to forbearance, auditors suggested that number is sure to rise. The percentage of students turning to forbearance as a long-term option, about 18 months, has doubled since 2009.

Those students were more likely to default on their loans after three years, as their loans swelled with interest. They faced long-term consequences such as bad credit ratings and barriers to securing employment and housing. Other repayment plans, such as income-driven repayment plans that allow loan forgiveness after 25 years, could be more beneficial, auditors said.

But it is in colleges’ best interest to push forbearance, auditors found. The loans are considered “in repayment,” and when forbearance extends for 18 months, it is nearly impossible for a student to default within three years of graduation.

The report was requested by House Democrats who ordered an inquiry into what they called a “shadowy industry” of debt management firms and the lack of oversight at the Education Department that has allowed them to flourish.

“These companies are giving borrowers bad advice in order to protect their own bottom line and to make sure certain schools’ default rates do not raise any red flags at the Department of Education,” said Representative Rosa DeLauro, Democrat of Connecticut, who commissioned the report along with Representative Mark Takano, Democrat of California. “Their reckless disregard for people’s lives is shameful — and it needs to stop.”

The Education Department disagreed with the G.A.O.’s recommendations that it seek legislation to improve the default rate and impose requirements for how schools and consultants communicate with borrowers after they graduate.

In the department’s response, James Manning, acting chief operating officer of the Office of Federal Student Aid, wrote that the department lacked statutory authority to oversee such measures, and that a recommendation to seek legislation to strengthen default rate measures should be directed to Congress.

Mr. Manning said the auditors neglected to point out that other loan repayment options were available, but that some of those options could have the same consequences as forbearance.

The department did agree that it could remind colleges to provide borrowers with accurate information and said that it could increase transparency around just how few schools are punished for high default rates.

The audit did not include names of consulting companies, nor did it include the names of schools who hired them. But auditors noted a conversation with one college president, whose school had nearly 90 percent of graduates in forbearance during the review period. When confronted with the evidence that his consultants were encouraging the option above all others, he stated that he did not care.