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Analysis: Student loan default data highlights for-profit colleges

Monday, December 14, 2009 | 12:01 a.m. CST

More than one in five borrowers of federal student loans who attend for-profit colleges default within three years of beginning repayment, new figures released Monday by the U.S. Department of Education show.

Historically, the government has reported such figures in terms of how many students default within two years — a figure that stands at 6.7 percent of student borrowers overall and about 11 percent at for-profit schools.

But the new three-year numbers, though preliminary, give a clearer picture of whether a student at a particular school will default, and the government will soon begin using them to help decide which colleges qualify for taxpayer-supported student aid programs.

Currently, schools with default rates over 25 percent for three straight years can be disqualified, but experts argued that schools were gaming the two-year figures. So starting in 2012, colleges will be judged on how many students default within three years of starting repayment, though the new threshold default rate for sanctions will be 30 percent instead of 25 percent.

Nearly 12 percent of borrowers who began repayment in fiscal year 2007 defaulted within three years — up from 9.2 percent for 2006. But at for-profit colleges, the rate was 21.2 percent within three years, The Associated Press calculated from the government's data. That was up from 18.8 percent for fiscal 2006.

Harris Miller, president and CEO of the Career College Association, which represents for-profit colleges, said the increase reflects the poor economy. He also said high default rates don't measure a school's quality, and noted that his group's members enroll large numbers of low-income students.

"If you accept low-income students you're going to have high default rates," he said. "It has nothing to do with whether you're for-profit or not."

In recent years, only a handful of institutions have lost eligibility for federal aid due to high default rates. However, the new data show more than 300 colleges — more than 85 percent of them for-profit schools — had three-year default rates higher than 30 percent. Those schools will have to improve when the rules kick in or risk losing federal aid.

However, most of those schools are smaller, local institutions and not the giant national chains. Among the better-known institutions, the data indicate a three-year default rate of 15.9 percent at University of Phoenix, 23.2 percent at Kaplan University and 17.1 percent at DeVry University.

Still, the three-year rates at those schools are all rising. Phoenix's rate was up from 10.3 percent for 2006, and Kaplan's was 16.6 percent. Ashford University, a rapidly growing for-profit, saw its three-year rate jump from 6.1 percent to 17.4 percent.

The figures do not include private student loans, just those from the government.

For-profit colleges are attracting a surging proportion of federal student aid dollars, the AP reported last month, reflecting the rising share of low-income students they educate. But critics say that's no excuse for higher default numbers; they say it leaves for-profit schools with a greater obligation to make sure students don't over borrow. Critics also contend students struggle to pay back loans because credentials from too many for-profit schools aren't rewarded in the job market.

Michael Dannenberg, senior fellow at the New America Foundation, said the school-level data searchable at http://fsadatacenter.ed.gov give students potentially valuable information to consider when considering college.

"In general, higher education is a good investment, but there are no guarantees," he said. "At some schools, there's a one in five chance you'll be in worse financial shape —three years out— than before you began."

Students, he added, should be careful about borrowing large amounts of money for college. "The debt can grow exponentially in default, and it follows you forever," he said. "College loans can almost never be discharged in bankruptcy."

Dan Madzelan, acting assistant secretary for postsecondary education, noted that while some for-profit colleges have high default rates, others are in line with traditional colleges. He also cautioned that for some schools with high rates but a low number of borrowers, the default rate numbers could be misleading.


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