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Short Title

Paying for Default

Abstract

Both federal spending on financial aid and student loan default rates have increased over the past decade. These trends have intensified policymakers’ concerns that some postsecondary institutions— particularly in the for-profit sector—maximize revenue derived from federal financial aid without helping students to graduate or find employment. Prior studies have analyzed federal financial aid disbursements and student loan default rates in isolation from one another. Therefore, little is known about how much federal aid flows through colleges with high student loan default rates. The present study examines change over time and across sectors in the share of federal financial aid disbursed to institutions with “low,” “medium,” and “high” student loan default rates. We found that the share of federal student aid flowing through colleges with medium and high student loan default rates increased substantially from 2007-08 to 2012-13, but declined in 2013-14 as the national job market improved. However, the reduction in federal financial aid disbursed to for-profit institutions with high student loan default rates occurred prior to the national job-market recovery, suggesting that federal regulations helped to divert federal financial aid from poor-performing institutions.

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