Analysis shows high student loan default rate at for-profit colleges

For-profit schools took in $23 billion in government aid during the 2008-09 school year.

A new U.S. Department of Education (ED) report details rising loan default rates among students at for-profit colleges as the for-profit industry – including some of the country’s largest online education programs – fends off government regulations that could limit their federal aid.

About 25 percent of students at for-profit institutions – such as the University of Phoenix and Kaplan University – defaulted on their school loans within three years of starting repayment, according to the federal analysis, released Feb. 4.

That default rate is up from a 21-percent rate at for-profit colleges in late 2009, according to ED. For-profit college students, who make up about 15 percent of all U.S. students, now account for 46 percent of all student loan defaults.

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Student loan defaults have increased as higher education enrollment has risen in the down economy. About 8 percent of nonprofit college students default on their loans within three years – up from 7 percent in 2009 – and students at public colleges and universities recorded an 11-percent default rate, marking a 1-percent increase.

For-profit college giants Kaplan Higher Education and Corinthian Colleges Inc. have campuses with default rates higher than 30 percent, according to the report. New Jersey-based Drake College of Business, a school with 543 students, posted the highest student loan default rate at 43 percent.

The analysis gives fuel to for-profit critics who have lobbied for the Obama Administration to institute “gainful employment” rules that would limit or deny federal aid to colleges and universities where the three-year default rate is 30 percent.

The Association of Private Sector Colleges and Universities released a statement in response to the federal report that said the organization was “disappointed” by the increase in three-year default rates, but said the analysis was based on “speculative numbers, not actual rates.”

“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,” the organization said in its statement, adding that its student population often consists of the “economically disadvantaged, and unfortunately this fact becomes most pronounced in difficult economic times.”

APSCU criticized ED officials for releasing three-year loan default rates without “an analysis of default rates based on schools’ student population demographics.”

For-profit college advocates said the latest loan default numbers are a dishonest attempt by the federal government to discredit successful schools and implement “gainful employment” regulations.

Michael Platt, CEO of Kansas-based PlattForm Advertising and a consultant to several for-profit colleges, said that middle and low income students who attend for-profit schools “will probably suffer a little more [during difficult economic times] than the person born with the silver spoon in their mouth. What [ED] wants to do is ignore the data showing that everyone is having a harder time repaying their loans.”

Platt called the push for “gainful employment” rules “insidious,” and said the regulations would likely be challenged in court. He said that would be “great news” for for-profit schools, believing the regulations would be struck down by a judge.

Sen. Tom Harkin, D-Iowa, chairman of the Senate Committee on Health, Education, Labor, and Pensions, and a longtime advocate of the federal “gainful employment” rules, said the latest three-year default rates “paint a troubling picture of life for students after they leave a for-profit college.”

Harkin added that “students who attend for-profit colleges are dramatically worse off after they leave than students at private or public nonprofit schools.”

The climbing default rates, he said, make it “clear that many of these education companies and their Wall Street owners are ripping off students and taxpayers to pad their own pockets.”

Harkin has delayed a Senate hearing on for-profit colleges first scheduled for Feb. 17. A Harkin spokesperson said Harkin’s office was working to “accommodate the schedule of a key witness” and a new date for the hearing would be announced soon.

Losing federal aid to back student loans would be devastating for many campuses, but especially so for for-profit institutions, which collected more than $23 billion in government aid during the 2008-09 school year – or 23 percent of all federal aid during that time, according to ED.

Fifty-seven percent of students who enrolled at for-profit colleges and universities from June 2008 to July 2009 left those schools without completing a degree program and saddled with student debt.

The federal analysis is the latest in a series of government reports that have put for-profit officials on the defensive.

In a report released last August, investigators from the Government Accountability Office (GAO) posed as college students and found that four out of 15 institutions they examined “encouraged fraudulent practices” to secure federal student loans, and representatives from all 15 colleges “made deceptive or otherwise questionable statements” to the undercover students.

Four of the GAO investigators who went undercover and applied to for-profit schools were encouraged by college personnel “to falsify their financial aid forms to qualify for federal aid,” according to the report.

In one case, a college recruiter encouraged the undercover applicant to hide $250,000 in savings so he would be eligible for federal student aid.

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