If you are thinking about applying to college — whether you’re currently in high school or are working and thinking about going back to school — chances are you are focusing on factors like location,…
If you are thinking about applying to college — whether you’re currently in high school or are working and thinking about going back to school — chances are you are focusing on factors like location, room and board, and tuition cost. These are important factors to consider when evaluating the total cost of attending a particular school.
If you plan to borrow money to pay for college, knowing how much you will need to borrow to get your degree is an important step in calculating the overall value of attending that school. But to really understand how well any particular college might prepare you for career success, you should consider how well-positioned you will be to actually repay that debt once you leave the school.
The cohort default rate, or CDR, is a powerful tool for understanding how previous students from that school have fared at repaying their student loans. The rate measures the percentage of borrowers who left a college or university and defaulted on their student loans within a three-year period.
Here are three reasons you should review a college‘s student loan default rate — and one big reason to look at other factors.
The CDR can tell you how risky a school is. If a school’s cohort default rate is too high, it could face penalties from the U.S. Department of Education and could even lose access to federal loans for its students altogether.
The Department of Education considers a school’s CDR to be too high if it hits 30 percent for three consecutive years, or 40 percent in any given year. If a school crosses either of these thresholds, the penalties imposed could increase the cost of borrowing to cover tuition and other expenses.
In September 2018, the Department of Education announced that the national average CDR for fiscal year 2015 was 10.8 percent. This represents the percentage of a school’s borrowers who entered repayment between Oct. 1, 2014, and Sept. 30, 2015, and defaulted prior to Sept. 30, 2017.
Search the Department of Education’s database for the schools you are considering. If the schools you are looking at have rates well above the national average, that could be a sign that attending that school carries additional risk.
Access to federal loans helps reduce the cost of attendance. If a school’s CDR rises too high and the school loses access to federal funds for its students, you will likely have to take out private loans to pay for tuition.
Since private loan qualification depends on a borrower’s credit history, not all students are eligible for them. Private loans generally have higher interest rates than federal loans. Private lenders also tend to provide fewer forgiveness or forbearance options if you experience financial difficulty after graduation, so private loans can be an expensive and risky proposition if they are your primary resource for covering the cost of attending a school.
Student loan repayment options may affect cohort default rates. Borrower protections built into federal loan programs such as loan forbearances, deferments and income-driven repayment options can reduce the efficacy of the CDR as a tool to understand how many of a school’s borrowers are able to successfully repay their loans.
These federal protections allow borrowers to substantially reduce their monthly payments — sometimes even to $0 for those facing extreme financial hardships. These programs offer strong protections to borrowers in financial distress and help them avoid falling into delinquency and default.
However, some borrowers may use up all of their deferment and forbearance eligibility early on in their loan repayment, while their financial challenges continue to grow. Many of these borrowers do eventually default on their student loans, but if they default more than three years after they leave a school, that default will not factor in to the school’s CDR.
Prospective students should therefore keep in mind that while a school’s CDR may seem low, the current model does not paint the full picture of students who are defaulting past the three-year mark.
Expected earnings can be more important than cohort default rates. As important as the CDR is for evaluating the overall strength of any given school, it doesn’t tell the whole story.
Because the CDR only tracks students for three years after they leave school, it doesn’t completely show borrower outcomes. A standard repayment plan for federal loans lasts 10 years, but some Income-Based Repayment plans can last for up to 25 years after graduation.
If you are comparing different schools and degree programs, you should also consider what you might expect to earn in a career based off of your course of study. Look at salary ranges for graduates who have majored in the degree programs at the schools you are considering.
Don’t just look at what the top graduates are making, but consider what those in the 50th through 75th percentiles are earning as well — that should give you a good idea of what you might expect to make after graduation.