Unveiling the Default Rate Dilemma: Identifying Colleges with Highest Default Rates

Student loan default rates have become a growing concern as the total amount of student debt continues to rise. When graduates are unable to repay their loans, it can have major financial consequences and affect their credit for years. But default rates are not evenly distributed across all colleges and universities. Some types of institutions have much higher default rates than others.

The relationship between student loan default rates and the type of college attended is an important factor for prospective students and their families to consider when choosing a college. According to the latest data, for-profit institutions have the highest collective student loan default rate, followed by public institutions and private institutions1. 

This article will explore the student loan default rates for different types of colleges, providing insights into which institutions have the highest rates of default.

Key Takeaways

• For-profit colleges have the highest student loan default rates by far compared to public and private non-profit schools.
• Nearly 50% of students who attend for-profit colleges default within 6 years of entering repayment.
• Community colleges have higher default rates than 4-year public and non-profit private colleges, but still much lower than for-profit defaults.
• Low graduation rates contribute to higher default rates, since students accrue debt but don’t get the degree and likely higher earnings to help repay loans.
• Demographic factors like family income, race, and parents’ education also correlate with varying default rates between school types.

Highest Default Rates at For-Profit Colleges

For-profit colleges dominate the list of schools with the highest student loan default rates. These types of institutions are run as businesses meant to generate revenue. They include large national chains like University of Phoenix, DeVry University, and ITT Technical Institute.

According to an analysis of federal data from 2015, almost 50% of borrowers who attended for-profit colleges defaulted on their loans within 6 years of entering repayment. The 3-year default rate at these schools was 25.6% in 2018 compared to just 7.3% at public colleges. Even the worst non-profit private colleges had default rates of 11.9%, still far below half of students at for-profits.

These extremely high default rates at for-profit institutions stem from a few key factors:

High tuition costs: For-profit colleges charge tuition rates much higher than community colleges and competitive with many 4-year universities. But their degrees have less prestige and value in the job market. Graduates struggle to earn enough to afford repayment.

Low completion rates: Only about 1 in 5 students at for-profit colleges complete their degree program. Those without a degree are more likely to default on loans they accrued with little benefit.

Targeting disadvantaged students: For-profit colleges explicitly recruit and enroll more minority, low-income, and first-generation college students. These students already face higher financial hurdles.

Predatory lending practices: Some for-profit institutions have been accused of pushing students into high interest private loans that are riskier and costlier.

These systemic issues contribute to half of all students who ever attended for-profit colleges defaulting on their loans.

Community Colleges Also Have High Default Rates

While for-profit colleges have by far the highest student loan default rates, community colleges also report higher default rates than 4-year public and private non-profit institutions.

The 6-year default rate at public 2-year community colleges is 26% across the latest federal data. At public 4-year colleges it is 9.4% and just 7% at private non-profit 4-year institutions.

There are a few key reasons community college default rates lag behind traditional 4-year institutions:

• Lower graduation rates – Only about 40% of community college students complete a degree or transfer within 6 years. Dropping out increases default risk.
• Less prestigious degrees – Even graduates of 2-year degrees earn less than bachelor’s recipients, making repayment more difficult.
• Serving non-traditional students – Community colleges enroll more part-time, older, and disadvantaged students who already face financial challenges.

Still, community college defaults are not nearly as bad as at for-profit schools. Their open enrollment mission provides access to higher education for millions of students, even if outcomes are uneven. And low tuition makes overall student debt levels much smaller than at for-profits charging many times more.

How Demographics Relate to Default Rates

When analyzing default rates across different college types, it’s also important to account for demographic factors.

Statistics clearly show higher loan default rates among:

• Low-income students
• First-generation college students
• Racial and ethnic minorities
• Students with lower SAT/ACT scores

For example, the 6-year federal student loan default rate for African American bachelor’s degree graduates is 23%, compared to just 9% for white graduates.

These demographic groups are overrepresented in the student bodies at community colleges and for-profit schools compared to more selective public and non-profit private 4-year universities.

Some of this correlates with the academic preparedness indicators that college admissions departments use to determine acceptance. For-profits often market specifically to disadvantaged minority demographics underserved by traditional higher education. And community colleges are open enrollment with no SAT score requirements.

So while for-profit and community colleges do have institutional factors that contribute to higher default rates, part stems from the types of students they serve. Even at public or private non-profit schools, minorities and Pell grant recipients have higher default rates than their peers.

Programs that provide extra support services to disadvantaged populations can help address this component of the default rate gap across institution types.

Steps Being Taken to Reduce Default Rates

In response to criticism over their high default rates, some actions have been taken:

• Stricter federal regulations on for-profit colleges to lose access to financial aid for continuing high defaults. Over a dozen major for-profit chains have closed recently.
• Community colleges creating default prevention initiatives, including financial counseling and contacts with borrowers in delinquency.
• Income-based repayment options can reduce default rates, although not solve underlying issues.
• Calls to expand Pell grants and tuition-free community college could lower borrowing needs and subsequent defaults.
• Loan forgiveness programs tied to public service or income levels may help, but have complex qualification processes.
• Potential accountability metrics beyond just default rates to better capture outcomes.

There is still considerable room for improvement to bring down high default rates, especially at for-profit institutions. But progress is being made through regulation and increased student supports. The goal is to expand access to postsecondary education, while ensuring it remains affordable and leads to careers that enable repayment success.

For-Profit Institutions

For-profit institutions have the highest collective student loan default rate, with 14.7% of borrowers defaulting on their loans1. These institutions often target vulnerable populations and provide subpar education, leading to higher default rates among their students.

Public Institutions

Public institutions have a lower default rate than for-profit institutions but still higher than private institutions, with 9.3% of borrowers defaulting on their loans1. The default rate varies depending on the specific program, with public institutions having a lower rate for programs that run for less than two years4.

Private Institutions

Private institutions have the lowest collective student loan default rate, with 6.7% of borrowers defaulting on their loans1. However, it is essential to note that this statistic includes both private nonprofit and private for-profit colleges, which can have significantly different default rates.

Four-Year Institutions vs. Less than Two Years or Two to Three Years Programs

Four-year institutions at private, public, and for-profit institutions have lower collective student loan default rates compared to their “less than two years” and “two to three-years” counterparts1. This suggests that students who complete their education within four years are less likely to default on their loans.

State-wise Variation

There is also a significant variation in student loan default rates across different states. For example, Mississippi had the highest student loan default rate (15.19%), while Massachusetts had the lowest (5.83%) 1. This variation can be attributed to factors such as job opportunities, cost of living, and the prevalence of for-profit institutions in each state.

In conclusion, the type of college attended plays a significant role in determining the student loan default rate. For-profit institutions have the highest default rates, followed by public institutions and private institutions. Four-year institutions generally have lower default rates than shorter programs, and there is a considerable variation in default rates across different states. Prospective students and their families should carefully consider these factors when choosing a college to minimize the risk of defaulting on student loans.