Roughly speaking, it looks like 5% is a kind of the "natural default rate."  I informally approximated that average from the overall and 4-year numbers, for any number of years out.  If we assume a certain, unknown sham element with for-profit schools, the most troubling numbers, related to the "natural default rate," are related to 2-year public and private institutions.  Those default percentages are ~totally~ unacceptable.

What I don't understand is that a lot of two-year schools (i.e. the community college variety) are supposed to be low cost.  They're subsidized by state and federal governments, yes?  So, what's going on there?  Are we giving those students too much financial aid that's being frivolously spent?  Or are the tuition, book, and other costs associated with those schools increasing too quickly?  Are these schools not being monitored with respect to the types of loans they're offering (i.e. predatory, high interest loans)?

- TL

The default measure as used in the student loan program does not indicate the long-term non-perfomance of a loan. Research we have done suggests that about half the loans that have been put into default enter repayment at a later date. Often, when a defaulter goes to buy a house or a car and is denied a loan because of a bad credit rating, they reenter repayment. The gross default rate, however measured, does not reflect the longer term non-performance of a loan.

Using defaults as a measure of educational quality is questionable. The research is consistent in showing that on average, propriatary schools do a good job of graduating high risk students and placing them in jobs. But many of the same factors that make a student high risk for academic success are also associated with high default rates. A single mother from a low-income background will be at risk of repaying a loan even with a good paying job because she has high living costs and no assets when she graduates. Any small economic setback may result in a default. If we are going to use loans as a way to help low-income students we do not want to drive educational institutions away from serving low income communities because of the risk of default.

A point of clarification about accreditation may be helpful. Regional accreditation, which most academic institutions use, does put emphasis on input and process measures. Proprietary schools are generally accredited by national accrediting agencies that require output measures such as graduation rates and placement rates as part of the review process.

Mr. Miller's argument is only missing one thing--facts, research, data.  Any of the aforementioned would be helpful in evaluating his conclusion.  His assertion that student defaults are indicative of institutional quality is an interesting hypothesis, much repeated.  Except there is no research to support it.  To the extent research exists on this topic, it suggests that 1) a student's socio-economic status prior to education and 2) graduation rates are more highly correlated that any other variables.   But more research would be helpful to understanding the problem and developing possible solutions because even the vast majority of students with low socio-economic status who do not graduate do repay their loans.  That is why CCA has suggested Congress do some research before thinking about changing the law on cohort default rates.  Mr. Miller also either misunderstands or misstates the accreditation process.  Leaving aside his shot at regional accreditors and state regulators, many private sector higher education institutions, on which he focuses his attack, are nationally accredited and require detailed outcome reporting, such as graduation rates and job placement rates on a regular basis.  Failure to meet certain targets can and does lead to negative actions by the accreditors.  Last but not least, Mr. Miller misses two other important measures of success of higher education institutions--though not necessarily of the legal kind:  1) the interest of students in choosing schools (the career college sector's rapid student growth irritates Mr. Miller, from what I can determine, but it is fact), without which a school cannot operate, and 2) the interest of employers in hiring graduates of those schools, which continues to be a great story for career college students.  Harris Miller

Harris Miller is the president of the Career College Association, which represents for-profit colleges.

The percentages alone (without the full calculations) do not reflect the smaller base.  Yes, the idea was that community college students can get by without using student loans.  In some cases states did not even actively encourage community college students to file the fafsa.  In the 2000s things have been changing.  Reasons include the relative decline in state support of postsec education.  Just like with federal disability assistance in the 1970s and 1980s, states are finding it convenient to shift costs to the federal govt.  The 2001 federal tax legislation also marked a change in the tax revenue relationship between the state and federal levels.  Part of the tax cut at the federal level came right out of the states, particularly with the estate tax.

One of the primary missions of community colleges is their "open admission" policy.  They cannot cherry-pick their admissions process to manage cohort default rates on the front end the way private institutions can.  Thus, if they are doing their jobs, they are admitting a lot of students who are at high risk for default.  If these students do default, the balances are generally small and not something they would need to work 50 years to pay off -- as is sometimes the case with private and proprietary institutions.  Further evidence of the low balances incurred by community college students is that they are largely ignored by loan consolidation companies, which focus on high-balance borrowers.  The cohort default rates of 4yr institutions in turn benefit from their targeting by consolidation lenders over the past few years.  Consolidation can "kick the can" (of default) further down the road by giving a "fresh start" to delinquency clock and reducing the monthly payment amount.  This accentuates the difference between the 2yr and 4yr rates.  Similarly, it is not cost-effective for "predatory, high-interest" alternative lenders to focus on community colleges.

Regarding whether the American postsec system is wasteful and spends financial aid resources too frivolously, some in the international community agree with that, i.e., the perception that too many resources here go to those who do not complete a certificate or degree and may not even be serious about doing so.  The implication is that the system could somehow be "fixed" so that the only students allowed to enter are those who would be "appropriate" for postsec and thus would be likely to complete.  Part of the American system, though, is that we do not generally "track" students from age 4 and divide them at that point into "college material" vs. other categories.  Should govt really be deciding which people to invest its scarce postsec resources in, and not let others attend college, except if paying out of pocket?  That type of policy would almost seem "unAmerican."  The US system allows almost limitless "second" chances.  This is even more relevant today as the era of the lifetime career is over, and thus people must return for additional education.

OECD (the Organisation for Economic Co-operation and Development), for example, has released reports which are fairly critical of America's financial aid system: "Were a good student loan system in place, with high limits and income contingent repayments, the rationale for means tested 'Pell' grants, which are favoured by the Administration and many policymakers, would be greatly weakened. In contrast to loans, grants involve large fiscal costs, redistribute money to those with high lifetime incomes, and appear to be of doubtful effectiveness. There remains some scope for grants in dealing with informational problems and externalities, but this would probably involve fewer payments."