Unusual (and Improper) Way to Lower Default Rates

Federal audit finds that New York for-profit college paid off students' loans to protect itself -- then turned delinquent borrowers over to collection agencies.
May 21, 2008

As members of Congress debated a proposal last winter that would have extended the time period the federal government uses to measure institutions' student loan default rates, the discussion raised anew concerns that some colleges, particularly in the for-profit sector, take questionable steps to keep students out of default calculations. Some institutions, critics suggest, may encourage borrowers to seek deferments or forbearance for lenders, postponing when they might go into default without necessarily improving their actual situation.

Career college officials and lenders often play down such accusations. But an audit released this week by the Education Department's Office of Inspector General offers an unusually glaring revelation of one such practice. The investigation by the inspector general found that Technical Career Institute, a commercial institution in New York City that faced the loss of access to federal funds because of persistently high default rates, "improperly" paid more than $440,000 to lenders to keep its students out of default.

The inspector general urges department officials to consider punishing the institute with the ultimate sanction: limiting, suspending or terminating its participation in federal student aid programs.

As laid out by the inspector general in its audit report, the career institute, which is owned by EVCI Career Colleges, received more than $20 million of federal financial aid for its students in 2005, including $10.5 million in Pell Grant aid and $8.9 million in guaranteed student loans. As part of a default prevention policy it put in place in October 2005, the college paid $440,487 to lenders in the Family Federal Education Loan Program to pay off loans for 301 students who withdrew in their first semester.

That may sound like a charitable act, but it wasn't. According to the department, the company "then attempted to collect the loan amounts from its students by entering into repayment plans" beginning 150 days after the end of their last semester at TCI. Of five students randomly examined by the inspector general's office, none had made payments to the company, and the college marked their accounts as delinquent and turned them over to collection agencies.

"We found the calculation of TCI’s FY 2005 official cohort default rate was incorrect, because the borrowers for whom TCI made loan payments to prevent defaults ... should have been considered to be in default for purposes of TCI’s cohort default rates calculation," the inspector general wrote.

The audit report recommends that officials in the department's Federal Student Aid office require the Technical Career Institute to stop making payments to lenders to prevent students from defaulting; rescind its referrals of borrowers to collection agencies, and direct the agencies to retract negative reports made to credit agencies. The inspector general also urged the student aid office to recalculate the institute's cohort default rate for the 2005-7 fiscal years, and to consider "limiting, suspending or terminating TCI's participation in [federal loan programs] based on TCI's practice of making payments on its students' FFEL Program loans."

Officials at the institute's New York City office said that only its president and chief executive officer, James Melville, was able to talk about the situation, but that he was unavailable to comment Tuesday. But the inspector general's audit itself contains a full response from TCI, in which it challenged the inspector general's findings and recommendations. The company said that its policies did not violate the Higher Education Act or federal rules, and that department officials had previously reviewed the institution's policies without any findings of wrongdoing.

Still, according to the inspector general's audit, TCI officials told the department that the institution would cease the practices in question.


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