Defaults Edge Higher

September 14, 2010

WASHINGTON – Student loan default data released Monday by the U.S. Department of Education served only to stoke the flames of debate over for-profit colleges and their students’ debt levels, as the default rates for the sector grew more dramatically than those of public and private institutions.

The nationwide two-year cohort default rate for loans that came due between Oct. 1, 2007 and Sept. 30, 2008 -- the federal government’s fiscal year 2008 -- was 7.0 percent, up from 6.7 percent in 2007. In all, 238,852 loans out of close to 3.4 million that entered repayment during fiscal 2008 were defaulted on by the end of September 2009, the department reported. The default rate rose most rapidly at for-profit colleges, from 11.0 percent in 2007 to 11.6 percent in 2008. At public institutions, the overall default rate increased from 5.9 to 6.0 percent, and at private institutions, from 3.7 to 4.0 percent.

Education Secretary Arne Duncan said the increased frequency of defaults was to be expected given the U.S. economy’s prolonged slump. “This data confirms what we already know: that many students are struggling to pay back their student loans during very difficult economic times,” he said in a statement. The national default rate was the highest it has been since 1997, when 8.8 percent of more than 2.1 million borrowers defaulted on their loans. The total number of defaults in the two-year calculation window was the greatest it has been since 1992, when there were just under 300,000.

Institutional Default Rates, 2006-2008

FY 2006 FY 2007 FY 2008
Institution Type # of Schools Borrower Default Rate # of
Borrowers Defaulted
# of Borrowers Entered Repayment # of Schools Borrower Default Rate # of
Borrowers Defaulted
# of Borrowers Entered Repayment # of Schools Borrower Default Rate # of
Borrowers Defaulted
# of Borrowers Entered Repayment
Public 1,646 4.7% 94,627 1,988,185 1,614 5.9% 102,919 1,721,629 1,618 6.0% 104,292 1,720,664
Less-than-2-year 153 6.4% 529 8,178 144 7.5% 595 7,832 145 6.7% 523 7,736
2-3-year 878 8.4% 44,439 523,749 846 9.9% 48,287 483,721 848 10.1% 49,331 487,436
4-year (+) 615 3.4% 49,659 1,456,258 624 4.3% 54,037 1,230,076 625 4.4% 54,438 1,225,492
Private 1,748 2.5% 26,735 1,055,567 1,718 3.7% 29,558 778,296 1,702 4.0% 30,620 761,129
Less-than-2-year 56 10.0% 359 3,589 46 12.6% 449 3,538 45 14.1% 537 3,794
2-3-year 190 6.1% 1,122 18,278 188 8.1% 1,204 14,798 180 8.2% 1,167 14,157
4-year (+) 1,502 2.4% 25,254 1,033,700 1,484 3.6% 27,905 759,960 1,477 3.8% 28,916 743,178
Proprietary 1,988 9.7% 82,995 855,523 2,008 11.0% 92,731 838,328 2,118 11.6% 103,764 889,034
Less-than-2-year 1,008 10.9% 15,426 140,302 1,039 12.0% 15,603 129,627 1,105 12.4% 15,418 123,454
2-3-year 728 11.1% 29,976 267,869 702 12.5% 33,030 262,640 723 12.6% 34,538 272,215
4-year (+) 252 8.4% 37,593 447,352 267 9.8% 44,098 446,061 290 10.9% 53,808 493,365
Foreign 466 1.2% 150 12,359 435 2.2% 163 7,276 421 2.2% 176 7,902
Unclassified 1 0.0% 0 6 1 0.0% 0 5 1 0.0% 0 5
Total 5,849 5.2% 204,507 3,911,640 5,776 6.7% 225,371 3,345,534 5,860 7.0% 238,852 3,378,734

During the 2008-9 federal aid award year, the department said, 26 percent of borrowers and 43 percent of defaulters had used their loans at for-profit colleges.

For-profit colleges have traditionally had a higher cohort default rate than have nonprofit colleges. As the Education Department has stepped up its scrutiny of the sector, cohort default rates have become only one measure of whether for-profit students are taking on manageable amounts of debt. Final regulations on “gainful employment,” which would track loan repayment rates and debt service-to-income ratios at the programmatic level for most for-profit offerings, are due to be published by Nov. 1, to go into effect on July 1, 2011.

Duncan used the release of the default rates as an opportunity to justify the department’s shift toward greater regulation of the sector. “While for-profit schools have profited and prospered thanks to federal dollars, some of their students have not,” he said. “Far too many for-profit schools are saddling students with debt they cannot afford in exchange for degrees and certificates they cannot use. This is a disservice to students and taxpayers, and undermines the valuable work being done by the for-profit education industry as a whole.”

Harris N. Miller, president of the Career College Association, a for-profit college trade group, pointed to studies that have shown that borrowers with “fewer financial resources have a harder time repaying loans” and that for-profit institutions have larger proportions of students from low-income backgrounds.

“We will continue to work with the Department of Education, students, graduates, lenders, and our institutions on default prevention strategies,” he added, “but we urge all involved to not use CDR rates, which fluctuate depending on the economy and are tied to student demographics, as a proxy on the value of our schools or the education we provide.”

But Debbie Cochrane, program director at the Institute for College Access and Success, said the new default rate figures “underscore urgent need for the Obama Administration to adopt and enforce regulations to curb career education practices that leave students deep in debt they cannot repay.”

Pending appeal, two institutions in West Virginia, the for-profit Charleston School of Beauty Culture and the private nonprofit Human Resource Development-Stanley Technical Institute, are in danger of losing their ability to accept federal student loans after operating for three consecutive years with cohort default rates above 25 percent. (This paragraph has been updated to clarify that the second institution is nonprofit.)

Cuttin’ Up Beauty Academy in Denver, Academy of Healing Arts in Las Vegas, and Clinton Junior College in South Carolina had default rates above 40 percent in fiscal 2008 and may also lose their loan eligibility. The first two are for-profit, vocational institutions, while the third is a nonprofit associate degree-granting college affiliated with the African Methodist Episcopal Zion Church.

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