How do you know if college is worth it? Given the ever increasing costs of getting a four-year degree and the horror stories of underemployed graduates, it only makes sense to wonder if the cost is justified. There are various attempts at calculating the Return on Investment (ROI) for colleges. At this point they’re more interesting than actually useful in comparing schools although that may change soon. So we decided to look at something much more basic, student loan default rates.
While the student loan default rate has its own issues, the premise is simple: a student took out a loan to college and is unable to make the payments.
Naturally, the default for any individual student may have nothing to do with the college. However, if a college has a lot of students defaulting compared to other colleges, wouldn’t you want to know why?
Comparing Defaulting Apples to Defaulting Apples
There is always the need to be aware of comparing apples to apples. Some colleges take a significantly larger proportion of low-income students or student with weaker academic credentials than others. It would be unfair to compare their results, such as default rates, with colleges that are much more selective in who they admit into their student body.
Nonetheless, when families are making final decisions on which schools to apply to or attend, they should take the time to look at default rates. The average default rate for public four-year colleges is 7.38% and for private colleges is 6.56%. If a college on your list has a rate significantly higher, you should take the time to find out why.
Causes of High Student Loan Default Rates
The first thing to look for is to see how many students are in the cohort. This is the group of students that is being used to calculate the default rate. If it is a small number compared to the general student population, it’s probably not something to worry about. After all, for the most part, students aren’t having to take out loans to fund their education. This is a good thing. And in such cases, it would be easy for a situation that has nothing to do the school to cause a high (or low) default rate.
However, if the cohort is large, then you should take the time to look at the college’s other financial indicators. What percentage of freshman are receiving financial aid from the college? Check the common data set and see the average percentage of need met for freshman? Take the time to visit the career center. Ask about their programs and placement rates.
We don’t recommend excluding a school from consideration based only on its default rate. But if a school does have a high default rate, you should have a very good reason for keeping it on your list.
The following table shows the lowest and highest three-year default rate for four-year colleges with 500 or more full-time undergraduates by state. Given that there can more than 20 points difference between the minimum and maximum, it’s a number to pay attention to if you want to make sure the college you choose will be “worth it.”