Loan-Default Rate at For-Profit Colleges Would Double Under New Formula

February 04, 2011

Data released by the Department of Education today show that while the official loan-default rate for students of for-profit colleges who entered repayment in 2008 was 11.6 percent, the rate would be more than double that, or 25 percent, under a stricter measurement standard that begins to take effect next year.

Under the new standard, colleges will have to track borrowers for three years once they begin repaying their student loans, instead of the two-year window that's in place now.

Colleges whose default rates are too high over several years can lose eligibility to participate in the federal student-aid programs.

Congress changed the measurement period in 2008 in response to concerns that the two-year rate didn't adequately capture the depth of the loan-default problem, because colleges and loan companies could use "default management" techniques to push many borrowers with repayment problems beyond the two-year window.

The new data follow the department's release a little over a year ago of "trial" three-year rates for students who entered repayment in 2007. As before, the department said it was providing the trial data for 2008 for  informational purposes only, so colleges would have an idea of trends that could affect their eligibility for federal student aid.

In the aggregate, rates for public and private nonprofit colleges also rose, but not by as much. (See table below.)

According to the department's figures, of the nearly 3.4 million students entering repayment status in 2008, 466,000 would be considered in default under the three-year measurement, while just under 239,000 were in default under the two-year calculation. About 222,000 of the defaulters in the three-year calculation attended for-profit colleges, 186,000 attended public colleges, and about 58,000 attended private nonprofit colleges.

Under the two-year measure, for-profit-college students account for about 43 percent of all loan defaults in the 2008 cohort; under the three-year measure, they would account for 47 percent.

Unlike the official default-rate numbers, which colleges can appeal before they are considered final, the three-year calculations released today are informational only, and department officials warned that in some cases, they may not be accurate.

Under the current rules, colleges with two-year 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 default rates of 30 percent or higher for three consecutive years could lose eligibility.

According to the newly released data, nearly 200 degree-granting colleges, most of them for-profit institutions, had three-year rates of 30 percent or greater for students who entered repayment in 2008. (See table with sortable data.) More than 40 of those colleges had rates above 40 percent.

Once the new law takes effect, if a college's default rate goes above 40 percent for any single year, it also would lose eligibility. At least 15 of the institutions with rates above 30 percent, mostly operating under the Everest brand, were institutions owned by Corinthian Colleges Inc., a California-based company that had as recently as this week boasted to stock analysts about its success in reducing loan defaults.

For-profit college officials have long maintained that their students default at higher rates because they are generally poorer, and face many more life challenges, than the college-going population at large.

In recent weeks, the Association of Private Sector Colleges and Universities, the trade association for the sector, has also suggested that a mishandling of some loan portfolios by the Department of Education has created communication mix-ups for some borrowers, which could be contributing to higher rates of default.

In a briefing with reporters Thursday, department officials said loan-servicing issues did not have a significant effect on the rates.

The data released today do not have a direct connection with the loan-repayment rates the department has proposed using as a cutoff measure as part of its controversial "gainful employment" rule. But with for-profit colleges lobbying feverishly against the gainful-employment proposal, department officials suggested in their briefing that the significantly higher default rates among for-profit colleges indicate that some of them pose bigger problems than other types of institutions.

Alex Richards contributed to this article.

Default Rates Grow With Use of 3-Year Window
  Official 2008 fiscal year, 2-year window Trial 2008 fiscal year, 3-year window
  Default rate Borrowers in repayment status Default rate Borrowers in repayment status
Public 6.0% 1,720,664 10.8% 1,721,050
Less than 2-year 6.7% 7,736 14.7% 7,621
2- to 3-year 10.1% 487,436 17.9% 485,038
4-year or more 4.4% 1,225,492 7.9% 1,228,391
Private 4.0% 761,129 7.6% 759,938
Less than 2-year 14.1% 3,794 26.1% 3,783
2- to 3-year 8.2% 14,157 16.7% 14,000
4-year or more 3.8% 743,178 7.3% 742,155
Proprietary 11.6% 889,034 25.0% 887,682
Less than 2-year 12.4% 123,454 27.6% 122,647
2- to 3-year 12.6% 272,215 27.9% 272,299
4-year or more 10.9% 493,365 22.7% 492,736
Total 7.0%* 6,741,654 13.8%* 6,737,340
* Includes foreign and unclassified institutions not listed separately.
Source: U.S. Department of Education

Correction (2/4, 4:05 p.m.): Because of erroneous data provided by the Education Department, the overall official two-year default rate for the 2008 fiscal year was incorrectly listed in the table. The correct rate was 7.0 percent, not 6.7 percent, and the table has been changed to reflect that.