Student Loan Defaults Threaten Federal Aid At 1,100 Colleges

Forbes

28-07-2025

CHAPEL HILL, NORTH CAROLINA - JUNE 29: People walk on the campus of the University of North Carolina ... More Chapel Hill on June 29, 2023 in Chapel Hill, North Carolina. The U.S. Supreme Court ruled that race-conscious admission policies used by Harvard and the University of North Carolina violate the Constitution, bringing an end to affirmative action in higher education. (Photo by)
New federal data suggests that over 1,100 colleges and universities are at risk of losing access to federal financial aid programs (such as Pell Grants and federal student loans) because too many of their former students are not repaying their student loans.
This alarming statistic is known as the Cohort Default Rate (CDR). It tracks the number of students who are in default on their student loans three years after graduation. The Covid-era payment pause that lasted from March 2020 to October 2023 offered temporary relief to millions of borrowers, and in turn dropped the CDR to 0%. However, now that repayment has resumed, nonrepayment has become a serious problem - and the impact extends to the colleges as well.
When the CDR is above 30 percent for three consecutive years, the school loses access to Title IV financial aid funds. If the CDR is above 40 percent in any single year, the school immediately loses access to Direct Student Loan funds.
According to the latest data from the Department of Education, 1,113 colleges had nonrepayment rates above 30 percent in May 2025. And 388 of those colleges had rates above 40%.
That's nearly 20 percent of the 5,736 colleges that the Department of Education tracks - meaning nearly one-fifth of colleges nationwide are at risk of losing federal financial aid dollars. This could have profound effects in access to higher education.
What The Cohort Default Rate Measures
A school's Cohort Default Rate (CDR) is calculated by dividing the number of borrowers who default on their student loans within three years by the total number of borrowers who entered repayment in that time.
Default is defined as failing to make a payment for 360 days. If a college's CDR exceeds 30 percent for three years in a row, or exceeds 40 percent in a single year, the Department of Education can remove access to federal financial aid for its students.
This matters because federal financial aid, including Pell Grants and federal student loans, is the primary way millions of students pay for college.
If a college is cut off for accessing federal financial aid programs, students may not be able to afford to attend, and the school could see enrollment and revenue collapse.
In the past, only a small number of for-profit institutions triggered CDR penalties each year. But that may be about to change.
Colleges can appeal a failing CDR, but the process is not automatic and does not guarantee relief. Even if aid is not immediately cut off, a high CDR is an embarrassing signal to students, families, and policymakers that an institution is not serving its graduates well.
The premise is that if such a high percentage of students cannot afford to repay their student loans after graduation, the school is charging too much and/or not preparing its students for the workforce after graduation.
Which Colleges Are At Risk?
The Department's data are not final cohort default rates but rather a proxy using interim data: the percentage of borrowers who entered repayment after January 2020 and were either in default or more than 90 days delinquent as of May 2025. Nearly 400 institutions already exceed 40 percent in this measure, while hundreds more hover above 30 percent.
And it's not just for-profit schools, there are many public colleges impacted as well:
One example of a public college is Albany State University. Of the 11,200 borrowers who entered repayment since 2020, 32 percent are now in default or more than 90 days behind.
Others include private colleges like Remington University in Texas, which had 14,900 borrowers enter repayment, and currently has a 43 percent default rate. This puts the college in immediate danger of losing federal aid unless the numbers improve significantly.
Community colleges, regional public universities, and private institutions all appear on the list of schools with high nonpayment rates.
The Department says it will release official CDRs next year, covering borrowers who entered repayment in 2023 and defaulted during 2023, 2024, or 2025.
Why Is This Happening Now?
The spike in nonpayment is not just a reflection of economic hardship. It also highlights the struggle to restart student loan repayment after a nearly five-year pause combined with all the confusion about the changes in student loan repayment.
As of May 2025, only 38 percent of borrowers with Direct Loans or Department-held FFEL loans are current on their payments, according to Department estimates. Roughly one-quarter are already in default or late-stage delinquency. The Department resumed collections in May and plans to begin wage garnishment by the end of summer.
In a 'Dear Colleague' letter sent in May, the Department urged colleges to take responsibility for improving repayment outcomes. Schools are being asked to contact all borrowers who left since 2020 to remind them of their obligations and direct them to repayment options on StudentAid.gov.
Colleges are also required to conduct entrance and exit counseling, disclose tuition and net price clearly, and report enrollment and student contact information accurately. These steps help ensure that borrowers know their responsibilities, can be contacted by their loan servicer, and avoid student loan default.
The Department emphasized that institutions have a financial stake in the outcomes of their former students. If students default in large numbers, the schools could lose the aid dollars that allows them to operate.
What Happens If Colleges Lose Access To Financial Aid Dollars?
Under federal rules, the consequences for high default rates are clear:
Even schools that stop offering federal student loans cannot escape penalties. Borrowers can enter repayment years later, and the CDR calculation continues as long as any former students from that school still hold federal loans.
Appeals are allowed for colleges, and they may stop some short term penalties, but long term, if the colleges don't improve their student outcomes, they will lose access to these dollars.
The net result is that colleges who don't improve the CDR of their borrowers risk losing federal aid dollars. Some colleges receive upwards of 90% of their revenue from Title IV funds - meaning if they are cut off from these sources, they'll have no choice but to close.
What Happens Next?
The return of repayment has exposed not just borrower struggles, but also structural problems at many institutions.
High loan default rates often correlate with low graduation rates, low earnings, or high debt levels. These are signs that students may not be getting the value they expected from their education.
Colleges that do not bring down their default rates risk more than just embarrassment, they may lose the main revenue source that keeps their doors open. And this can have profound effects for both existing students and graduates.