[Updated (8/29/2012, 3:01 p.m.) with comment from DeVry.]
A student-advocacy group says several of the largest for-profit college companies are using questionable tactics to artificially manipulate their student-loan default rates to protect their continued access to federal student aid, and it has asked the Department of Education to step in to halt the practices.
The Institute for College Access & Success says only a department investigation can determine whether the default "evasion" tactics that it says companies like the Career Education Corporation, Corinthian Colleges, and ITT Educational Services appear to be using are illegal. But there is no question, said Lauren Asher, the group's president, that the companies' tactics "are already harmful."
Colleges are now required to track borrowers for three years once they begin repaying their student loans, and institutions can lose eligibility for Pell Grants and federal student loans—a major source of revenue for most for-profit colleges—if that "cohort default rate" is too high for several years in a row.
In a memorandum to the department and others, the advocacy group, which is known by the abbreviation Ticas, cited several tactics that it says companies appear to be using to mask the loan-repayment problems of their former students.
One of them, it says, is the widespread "abuse" of forbearances and deferments to delay defaults so they won't occur during the period on which the college's cohort default rate, or CDR, is measured.
Currently, cohort default rates are calculated over the first two years after students leave college and are scheduled to begin repaying their loans. But a three-year measurement period is being phased in and will be fully in effect in 2014. Using deferments and forbearances to keep students out of the calculation will be harder to do then.
Deferments and forbearances are just two of the options available to students who have difficulty repaying their loans. Others include alternative repayment plans, like income-based repayment. The Ticas memo urges the department to investigate companies for "serial forbearance and deferments, which are an indication that borrowers are not receiving proper counseling" on other options that may serve them better.
Curing High Default Rates
In its memo, Ticas notes that companies like Corinthian and ITT have recently boasted to investors about using forbearances and deferments to "cure" their high default rates, although the rates at which their former students are actually repaying their loans hasn't markedly improved.
The memo also cites a recent report by the U.S. Senate education committee, which conducted a two-year investigation into for-profit colleges. That report said that ITT and three other major companies—Bridgepoint, DeVry, and Strayer—also "cured" their defaults with the help of a Sallie Mae subsidiary, the General Revenue Corporation, that made heavy use of forbearances and deferments to keep rates low. Yet only about a quarter of the companies' former students were repaying their loans.
On Wednesday, DeVry officials took issue with the Ticas view. DeVry said the Ticas memo implied that GRC works with all companies in the same way, while the Senate report noted, “unlike other companies DeVry prioritizes repayment by paying GRC a bonus for students placed in repayments and certain deferments, but not for forbearances."
The corporate annual report that Corinthian recently filed with the Securities and Exchange Commission shows several incidences where the company reported notable reductions in its default rates from one year to the next, with rates for one of its Everest Institutes, in Texas, dropping from 29.7 percent in 2009 to 4.8 percent for 2010, and for one of its Everest Colleges, in Colorado, from 27.7 percent to 3.7 percent. (The figures were based on draft rates the department released to the colleges a few months ago; the official figures for 2010 are expected to be published in September.)
"Clearly CDR manipulation is happening at the expense of students and taxpayers," said Ms. Asher.
A Last Resort
Forbearances can help students avoid default but should only be used "as a last resort," Ms. Asher said, because they can be costly to students. Interest accrues on loans in forbearance. And, said Ms. Asher, when used as a go-to tool, they "can be used to distort the real distress that borrowers may be in."
A Corinthian spokesman, Kent Jenkins, said that the use of forbearances has helped the company reduce its default rates but that they are just one of many tools it has employed. He said Corinthian had invested $40-million over the past three years for new systems and personnel, including financial counselors at each of 100-plus campuses, to help curtail defaults.
ITT officials did not respond to a request for comment, nor did the Education Department. Ms. Asher said Ticas had not received a response from the Education Department.
Another tactic cited in the Ticas memo relates to how colleges report their data. Most of the major for-profit college companies that own numerous colleges don't have a single default rate. Instead, the rates are calculated for institutions by department-issued identification numbers known as OPEID's. Each OPEID may include a number of campuses, and companies with multiple OPEID's can shift campuses from one identification number to another. In this way, a company that has some institutions with high default rates can merge them with others where the rates are lower in an effort to eliminate OPEID's with high default rates.
Recently ITT merged 29 of its OPEID's into three. In its memo, Ticas says ITT executives cited concern about "compliance" with federal regulations as one of the reasons for that move.
Earlier this year Career Education also sought to consolidate up to 19 of its 26 OPEID's into just one. The Ticas memo says four of those 19 had default rates that were close to the cutoff point for federal aid.
The company recently withdrew its request, saying that the department's inaction on its application was holding up other academic changes the company wanted to make. Still, said Ms. Asher, Career Education's request was indicative of the company's intent to use the tactic, which the memo calls an attempt to "mask serious known quality problems at campuses that may otherwise have exceeded thresholds for federal funding."
Under old laws, colleges with two-year cohort default rates of 25 percent or greater for three consecutive years can lose eligibility for federal student aid, a particular concern among for-profit colleges where such aid is a lifeblood. Under the new rule, colleges with three-year cohort default rates of 30 percent or higher for three consecutive years could lose eligibility.