Two-Year College Financial Aid Default Rates: Relative Density ...

In August, 2012, I summarized my?study?of?federal financial aid default rates for four-year institutions.?The following is a summary of the distribution of federal financial aid default rates for public, private nonprofit (NP) and private for-profit (FP) two-year institutions.

The data for the study was obtained from The National Student Loan Data System (NSLDS) and Integrated Postsecondary Education Data System (IPEDS). Unless otherwise indicated I utilized the three-year default rate values from the database.

Descriptive Statistics

Let?s begin by examining basic descriptive statistics associated with default rates for two-year colleges. Table 1 depicts the highest mean default rate among the private FP sector. In addition, default rates among public two-year institutions exceed private NP by 5.47 percentage points.

Table 1 Summary of Default Rate
Sector	Mean	Std. Dev.	Freq.
Public 2yr	15.07	10.04	990
Private nonprofit 2yr	9.66	11.29	157
Private profit 2yr	22.48	12.05	632
Total	17.22	11.67	1779

Figure 1 ? a density distribution of default rates among two-year institutions ? also conveys a similar generalization that the private FP sector exhibits higher default rates than the public or private NP two-year sectors. Public two-year colleges also appear to have greater default rates than the private NP sector.

Figure 1

However, much of the information in the default rate distributions is left untapped in Table 1 and Figure 1.? Relative distribution methods provide a more illuminating analysis of sector differences in default rates. ?The motivation for this research is to fill the void in the literature for analyzing the distributional differences among the sectors of higher education. Relative density analysis provides the statistical tool to accomplish this goal.

Relative Density Analysis

I. Public & Private FP Comparison (Figure 2)

Figure 2

At the median default rate of the private FP distribution (reference group) the proportion of public two-year institutions (comparison group) with this level of default rate productivity is equal to .80. This means 80 percent of public two-year institutions enjoy lower median default rates than median private two-year FP institutions. This provides very strong evidence for superior default rate performance for public two-year institutions when compared to the private FP two-year sector.

II. Public & Private NP Comparison (Figure 3)

Figure 3

At the default rate median of the public two-year distribution the proportion of private NP two-year institutions with this level of default rate productivity is equal to .78. This means 78 percent of private NP two-year institutions enjoy lower median default rates than median public two-year institutions.? At the 30^th percentile of the public two-year distribution the proportion of private NP two-year institutions is equal to .72. This means 72 percent of private NP two-year institutions enjoy lower default rates than public four-year institutions at the 30^h percentile as defined by the public two-year distribution.

III. Private NP & Private FP Comparison (Figure 4)

Figure 4

At the 30^th percentile of the default rate associated with private FP two-year institutions the proportion of private NP two-year institutions with this level of default rate productivity is equal to .79. This means 79 percent of private NP two-year institutions enjoy lower default rates at the 30^th percentile of private FP institutions. At the median default rate of the private FP distribution the proportion of private NP two-year institutions with this level of default rate productivity is equal to .85. This means 85 percent of private NP two-year institutions enjoy lower median default rates than median private FP institutions.

IV. Brief Literature Review

A comprehensive literature review (Gross, et al. 2009) regarding the relationship between institutional characteristics and default rates summarizes the relationship as follows:

?Descriptive analysis suggests that students who attend less-than-two-year, proprietary, or community colleges have higher default rates than their peers at four-year or more selective institutions (Podgursky, Ehlert, Monroe, Watson, & Wittstruck, 2002; Woo, 2002a, 2002b), even when the time horizon for considering default is extended to eight years (Kesterman, 2005). Once borrowing behaviors, student background characteristics, and institutional resources are considered, however, these differences largely disappear (Emmert, 1978; Flint, 1997; Knapp & Seaks, 1992; Volkwein & Cabrera, 1998; Volkwein, Szelest, Cabrera, & Napierski-Prancl, 1998; Wilms, Moore, & Bolus, 1987). Students who attend proprietary or less-than-four-year institutions tend to borrow more, to come from lower-income families, and to belong to a racial or ethnic minority group?characteristics associated with increased likelihood of default (Gladieux & Perna, 2005; Goodwin, 1991). Moreover, greater institutional investment and instructional support is associated with decreased likelihood of default (Volkwein & Szelest, 1995). Generally, the wealthier the institution attended and the greater the student?s access to social and economic capital the less likely the student is to default.?

V. Discussion

High student default rates do not serve the short or long term interests of students, institutions of higher education or the expectations of taxpayers. ?High default rates threaten access to needed student financial aid, assuring institutions of higher education remain engines of equal opportunity and upward mobility.

In response to the above?analysis a colleague asks, ?What do the private nonprofits do differently?? Attract a different student?? Or do a better job of managing/supporting their students/graduates?? At a minimum the answer is most likely a combination of the two factors embedded in the question: 1) attracting students whose characteristics are associated with lower default rates and 2) institutional investment and instructional support decreasing the likelihood of default.

The following is narrowly focused on one component of the private?nonprofit?two-year college default advantage, specifically the advantage of attracting students whose characteristics lower the nonprofit default rate. As such, it is an incomplete answer to a complex issue. However, if I had to select one student variable impacting the issue at hand it would be the private nonprofit advantage in attracting students with higher socio-economic status (SES). Student SES is highly correlated with graduation rates and, very importantly for this analysis, the majority of research suggests that completing a postsecondary program is the strongest single predictor of not defaulting regardless of institution type (Gross, et al. 2009).

Table 2 depicts socio-economic status by sector for independent students below $12,000. These students are at much higher risk of not completing a postsecondary program and therefore more likely to default on their loans. The largest separation in Table 2 is between public and private nonprofit two-year institutions on the one hand and private for-profit two-year instituions on the other.? Public two-year colleges attract a smaller proportion (5%) of at-risk students than nonprofit institutions. However, inspection of Table 3, depicting the percent of aid applicants over $60,000, demonstrates a much larger advantage of nonprofit colleges attracting students more likely to graduate, lowering private nonprofit default rates.

However, the above measures which summarize the private nonprofit advantage in attracting students who are less likely to default do not capture the full distributional advantages nonprofits enjoy. Relative distribution analysis provides an opportunity to shed some light on the sector distributional differences.

Figure 5 demonstrates that at the median of the private nonprofit distribution the proportion of public two-year institutions with equivalent dependent aid applicants over $60,000 is equal to .97. This means 97 percent of median public two-year institutions have fewer dependent aid applicants over $60,000 than median private nonprofit two-year institutions.

Figure 5

I suspect this student SES advantage accounts for a large proportion of the default rate advantage enjoyed by private nonprofit colleges.? However, relative distribution analyses are descriptive by nature, not explanatory, so caution is warranted.? Obviously there are many other variables involved in the superior default outcomes that private nonprofit two-year colleges enjoy. In addition I have often thought there are some best practices that the nonprofits employ that public two-year colleges could emulate. Unfortunately too often the communication lines with private nonprofit colleagues haven?t allowed a deeper and richer understanding of their culture and processes.

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Reference

Gross, et al. (2009). What Matters in Student Loan Default: A Review of the Research Literature.?Journal of Student Financial Aid,?39(1).

Source: http://www.decisionsonevidence.com/2013/01/two-year-college-financial-aid-default-rates-relative-density-analysis/

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