New rules for student loan defaults would cause many schools to lose federal money. According to an article in the Chronicle of Higher Education:

More than 220 colleges have long-term student loan default rates so high that they would lose all federal student financial assistance under the terms of a new law that eventually will measure those rates over a three-year time scale, according to new Education Department figures.

Under existing federal law a school can be entirely cut off from receiving federal financial aid if more than 25 percent of students defaulted on loans within two years of leaving school. This formula is in place as a rough gauge for student success; if many, many students default on loans the school probably did not prepare them very well for careers beyond school.

Under a law approved last year, formulas will count students who default within three years of leaving school. The law was designed because of the worry many that schools were helping former students to avoid default within two years of graduation but dropping assistance as soon as the federal formula window closed.

According to the New York Times article about the rule change, “more than one in five borrowers of federal student loans who attend commercial colleges default within three years of beginning repayment.” In 2007, 36 schools had problems with excessive default under the 2-year rule. If the new formula were instituted today, 221 colleges would lose federal funding. The new formula does not actually come into effect until 2012.

Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer