U.S. Says 25 Percent of For-profit Students Default

For-profit schools’ former students default at more than double the rate of those from nonprofit schools, according to data released by the U.S. Education Department as part of its effort to push for tougher regulation of the controversial institutions.

The Education Department has criticized some for-profit schools, which range from universities offering PhD’s to trade schools offering training to repair cars or take X-rays for medical offices.

Fully 25 percent of students who either graduated or dropped out of these for-profit schools in 2008 defaulted on their student loans within three years, compared with 10.8 percent of public schools and 7.6 percent of private schools, the Education Department said in its data.

That is a pronounced jump from when the department calculated data for students who defaulted after two years, leading the administration to believe that some for-profit schools worked with former students to keep them current in payments for two years, and then abandoned the effort.

Shares of several for-profit education companies fell in morning trading.

The Association of Private Sector Colleges and Universities, a trade group representing more than 1,500 for-profit schools, said the increase in default rates followed trends in other types of consumer loans, such as credit cards and home mortgages.

"An economy marked by near double-digit unemployment for a sustained period has contributed substantially to this problem," the APSCU said in a statement.

Under proposed regulations, colleges would be ineligible for aid if fewer than 35 percent of former students are paying back loans despite being capable of doing so after three years. The rule — which could become final this month — is slated to take effect in mid-2012.

Losing federal aid could cripple some for-profit schools, many of which have been criticized for signing up unprepared students, helping them get federal loans and then inadequately educating them.

For-profit schools are opposing the new rules, arguing that reaching back three years constitutes a retroactive crackdown on student loan defaults. Once the rules are final, they are likely to sue to stop their implementation.

The Everest brand of schools, owned by Corinthian Colleges (COCO.O), had just over 20 schools whose students defaulted at a rate of 30 percent or higher, the data showed.
Washington Post’s (WPO.N) education unit, Kaplan Higher Education, had more than 10 schools with default rates above 30 percent and another eight with default rates above 20 percent, according to the Education Department figures.

Corinthian spokesman Kent Jenkins said the schools had made a major investment in bringing down their default rates. "We recently reported that it has had a significant positive effect," he said. "This will be evident beginning with the 2010 cohort of students."

The Washington Post had no immediate comment.

The schools have argued that they are willing to take chances on higher-risk students — poorer students or those whose parents did not attend college — and so the higher default rates are to be expected.

But the Education Department, which is skeptical of that defense, has already finalized a long list of other rules aimed at the for-profit sector.

The APSCU filed a lawsuit against some of those rules last month and asked the court to toss them out.

One rule challenged by the suit is aimed at stopping deceptive advertising by schools. Another bans the practice of basing recruiters’ pay on how many students they enroll, and a third requires states to authorize post-secondary schools for their students to be eligible for federal loans.

Other finalized rules ban incentive pay for admissions recruiters, limit the creation of new programs, require disclosure of graduation rates and job placement rates to new students and strengthen the department’s hand in taking action against schools that fail to advertise honestly.

The prospect of the rules has already roiled the sector, as some schools tighten enrollment standards in a move to push down their loan default rates and increase graduation rates.
Career Education (CECO.O), Apollo Group, (APOL.O) and Kaplan have all slashed hundreds of jobs.

Senator Tom Harkin, who has been leading the push in Congress to tighten regulation of the schools, said the data showed they have hurt rather than helped students.

"With for-profit students amounting for almost half of all student loan defaults," he added, "serious questions have to be raised about the taxpayer investment in these companies."

Corinthian shares were down 4.3 percent at $4.87, while Career Education fell 1.8 percent to $22.65, and Apollo fell 1.1 percent to $41.94. Washington Post stock fell 1 percent to $438.01.


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