September 14, 2013

Even Ivy Leaguers default on student loans

How the top-ranked schools fare when it comes to student debt

The latest college rankings by U.S. News & World Report are out, and Princeton University once again tops the list. But is the New Jersey Ivy League school the smartest financial move for the nation’s smartest students?

One data point to consider is the rate at which graduates default on student loans, a commonly cited barometer and one that’s been embraced by the federal government.

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A Princeton University graduation ceremony

By this measure, the number one school appears not to fare as well as others on the list. A Princeton graduate is four times as likely to default on student loans than one from say, the seventh-ranked Massachusetts Institute of Technology. But experts say the numbers are deceiving, and one should read little, if anything, into this data.

Princeton’s so-called cohort default rate is 2.2%. This is calculated by the Department of Education as the percent of the university’s borrowers who entered repayment on federal student loans from October 2008 through September 2009 and defaulted before Sept. 30, 2011 (the latest available). At MIT, the rate is 0.5%. And at California Institute of Technology it is 0%. But the number of borrowers from the Ivy League school who are actually in trouble is minuscule, underscoring why students and their families might not want to pay much attention to default rates when choosing a college.

Here’s the reality: Just three repaying borrowers from Princeton are in default from the period mentioned above versus five from MIT, according to the Education Department. Princeton’s rate is worse because the three borrowers in default come from a smaller group of borrowers who are in repayment—just 132—versus 876 from MIT. And of course, no matter how the data is diced, the bottom line for both schools and their students is that they have extremely low defaults compared with the national average for the same period, which is 13.4%, according to the Education Department.

At a time when student-loan debt has surpassed $1 trillion and defaults on these loans are rising, students, particularly those from lower- to middle-income families at many high-ranked institutions, have been largely able to avoid these headaches. In many cases, they don’t even have to take out student loans. For example, all of the Ivy League universities have no-loan policies, which replace loans with grants and other free aid for at least some of their students who demonstrate financial need. In Princeton’s case, this happens for all students who qualify for financial need. As a result, just 5% of its more than 5,000 undergraduate students during the 2011-12 academic year were signed up for federal student loans, according to the latest data from the Education Department. Aside from the Ivy League schools, most of the other institutions on this table, including MIT, offer some sort of no-loans policy to students.

To be sure, default rates can be more helpful to students who attend less selective colleges, including public and private schools that have less free aid to give out where thousands of students end up using loans to pay tuition. In general, a college with a double-digit three-year default rate can be a red flag for students, since it suggests that a significant number of former students are having difficulty repaying their loans, says Mark Kantrowitz, senior vice president with Edvisors.com, which publishes college-planning websites.

Another reason why several of these schools, including MIT and California Institute of Technology, have low defaults is that they have a large number of students in majors with low unemployment rates when they graduate. “Having a STEM [science, technology, engineering and math] major from a top college pretty much guarantees you get a good-paying job and lessens the chances of default,” says Kantrowitz, who also happens to be an MIT graduate.

Recent college graduates who majored in math or general engineering had an unemployment rate of 5.9% and 7%, respectively, according to 2010-2011 data of college graduates analyzed by Georgetown University’s Center on Education and the Workforce that was released earlier this year. That was below the overall unemployment rate for recent graduates, which averaged 7.9% in spring 2011 and double-digit unemployment rates for some social science and arts majors.

One more factor that impacts default rates: borrowers who delay payments through a deferment, a period of time after the loan enters repayment when borrowers are not required to make payments. Students who go on to graduate school and need to delay payments as well as those who demonstrate a financial hardship, like unemployment, can sign up for deferment and they’re not counted in the cohort default rate, says Kantrowitz.

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