In Rising Student-Loan Defaults, More Fodder for Fight Over 'Gainful Employment' Rule

September 13, 2010

The percentage of borrowers defaulting on their student loans has risen for a third year in a row, reaching an 11-year high of 7 percent, according to U.S. Education Department data released on Monday.

As usual, the "cohort default rate" for 2008, the most recent data available, is highest at for-profit colleges, averaging 11.6 percent, a 0.6-percent increase over the previous year. The rate for public colleges is 6 percent, up from 5.9 percent. For private colleges, the rate is 4 percent, up from 3.7 percent.

The numbers represent the share of students who entered repayment in the 2008 fiscal year and defaulted by the end of last September.

In a news release, Education Department officials used the data to make their case for a crackdown on for-profit colleges. This past summer the department issued a package of proposed rules aimed at protecting students and taxpayers from the consequences of student-loan defaults, particularly at proprietary institutions. Final rules are due by November 1.

"While for-profit schools have profited and prospered thanks to federal dollars, some of their students have not," Secretary of Education Arne Duncan said in the news release. "Far too many for-profit schools are saddling students with debt they cannot afford in exchange for degrees and certificates they cannot use."

Lobbyists for for-profit colleges say the recent rise in defaults is a reflection of the weak economy, not the quality of their institutions. In a news release, the Career College Association argued that default rates should not be used "as a proxy on the value of our schools or the education we provide."

"In a climate marked by near double-digit unemployment, it is not surprising that former students continue to find it more difficult to repay their student loans," said Harris N. Miller, the association's president.

Under federal rules, colleges with default rates greater than 25 percent for three consecutive years, or 40 percent for a single year, can lose their eligibility to award federal student aid.

This year two colleges exceeded the first cap: the Charleston School of Beauty Culture, in Charleston, W.Va., and Human Resource Development & Employment-Stanley Technical Institute, in Clarksburg, W.Va. Three colleges had rates of greater than 40 percent: Cuttin' Up Beauty Academy, in Denver; Academy of Healing Arts, in Las Vegas; and Clinton Junior College, in Rock Hill, S.C.

Monday's data release fell less than a week after the end of a public-comment period on the most controversial of the department's proposals designed to protect students and taxpayers, known as the "gainful employment" rule. The department received close to 85,000 comments on that rule, which would cut off aid to programs whose students have the highest debt burdens and lowest loan-repayment rates. For-profit colleges say the rule would ravage their revenues and force them to close thousands of programs serving low-income and minority students.

The government's annual cohort default rate is a snapshot in time, reflecting the share of students who default on their loans within two years of leaving college. As such, the data capture only a sliver of the defaults that occur over the life of a loan, a recent Chronicle analysis found. According to that analysis, one in every five government loans that entered repayment in 1995 has gone into default.