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By Paul Bradley  /  
2011 February 21 - 12:00 am

New Metrics Result in Steep Climb in Default Rates

WASHINGTON — It was back in 2008 that Congress approved gradually changing the rules for measuring default rates on federal student loans, insisting that they be tracked over three years starting in 2014 instead of the current two.

The concern then was that the two-year rate failed to capture the full dimension of the country’s loan-default problem because some colleges — particularly those in the for-profit sector — were becoming adept at gaming the system, pushing borrowers with repayment problems outside of the two-year window with aggressive loan management tactics.

Now the first data using the three-year measure has been released by the U.S. Department of Education, and it significantly increases default rates across the board, but especially for the for-profit colleges.

Using the two-year metric, for example, the official loan default rate for students of for-profit colleges who entered repayment in 2008 was 11.6 percent. Under the three-year window, the rate jumps to 25 percent.

For public community colleges, the two-year rate was calculated at 10.1 percent. Under the three-year calculation, the default rate is 17.9 percent.

Though currently considered experimental, the new rates are much more than a bureaucratic exercise. Under the new rules, to be filly implemented in 2014, colleges with a 30 percent default rate for three straight years can lose their eligibility for U.S. student aid. According to the newly released data, nearly 200 colleges, most of them for-profit institutions, had three-year rates of 30 percent or more.

Federal student aid is the lifeblood of for-profit colleges, which derive nearly 90 percent of all their income from federal financial aid programs. For-profit colleges received about $32 billion last year through federal financial aid.

U.S. Sen. Tom Harkin
(D-Iowa), said the data presents a “troubling picture” for students at for-profit colleges. Harkin has vowed to push legislation to restrict grants and loans to the for-profit education industry.

“These numbers paint a troubling picture of life for students after they leave a for-profit college, with one quarter of for-profit college students defaulting on their loans within three years of leaving school,” he said in a statement. “It is also clear from these default rates that students who attend for-profit colleges are dramatically worse off after they leave than students at private or public nonprofit schools. And with for-profit students amounting for almost half of all student loan defaults, serious questions have to be raised about the taxpayer investment in these companies.

“Coupled with the sky-high tuition costs, alarming drop-out rates and the many other bad practices uncovered in our investigation, it is clear that many of these education companies and their Wall Street owners are ripping off students and taxpayers to pad their own pockets,” he said.

For-profit college officials contend their students default at higher rates because they are generally more economically disadvantaged that the larger college-going population.

The Association of Private Sector Colleges and Universities, a trade group for the for-profit education sector, released a statement attributing the climbing default rates to the poor economy.

“We are disappointed to see increases in the cohort default rates projected for our students and for students in all of higher education,” the statement said. “These are speculative numbers, not actual rates however, and follow general trends in consumer loan defaults, such as credit cards and home mortgages. APSCU will continue working with its member schools on steps to curb defaults and to assure that borrowers are getting all the information they need to manage their debts responsibly.

“At the same time, we must remember that cohort default rates tend to rise and fall with the economy and the ability of borrowers to get and keep good jobs and incomes. An economy marked by near double digit unemployment for a sustained period has contributed substantially to this problem.”

The new data adds another talking point to the heated debate over for-profit colleges and whether they are deserving of increased scrutiny and tighter regulations. The Education Department is currently developing a “gainful employment” rule that would tie federal student aid programs to loan repayment rates and other metrics. The proposal has touched off a fierce debate in Congress, with for-profit schools lobbying feverishly to block the rules.

The APSCU last month filed a federal lawsuit seeking to overturn the new Education Department regulations, claiming they will harm institutions and students.

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