Student default rates soar at for-profit colleges

The proportion of borrowers defaulting on federal student loans continued to increase during the Great Recession, according to Education Department data released Monday.

The two-year "cohort" default rate, which represents the proportion of federal loan borrowers who entered repayment between October 2008 and September 2009 and had defaulted on their loans by the end of September 2010, increased to 8.8 percent, the highest such rate since 1997. The rate increased 1.8 percentage points from fiscal 2008.

While students in all sectors were likelier to default on their loans than they had been the previous year, defaults increased the most at for-profit colleges: 15 percent of borrowers from those institutions defaulted in 2009, compared with 11.6 percent in 2008. That was more than twice the rate at public and not-for profit private institutions. Critics have compared for-profit colleges' exhorbitant tuitions and the huge federal loans students take out to pay them to the sub-prime mortgage bubble that led to the Great Recession.  

Defaults increased to 7.2 percent at public institutions, from 6 percent in the 2008 fiscal year. At private institutions, the default rate increased from 4 percent in 2008 to 4.6 percent in 2009.

The rates are the first to consist entirely of loans that entered repayment during the worst of the economic downturn, and Education Department officials pointed to the bad economic situation as a major factor in the increase in defaults. Defaults tend to increase as unemployment rises, and delinquency rates on other types of credit, such as mortgages and credit cards, increased during the same period, they said.

But officials also pointed to booming enrollments at for-profit colleges as a contributing factor. Default rates have historically been higher for students at for-profit institutions. Nearly half of the 320,000 defaulting borrowers who began repayment in fiscal 2009 were enrolled at for-profit colleges, said James Kvaal, the deputy undersecretary for education, during a conference call with reporters.

Since fiscal year 2005, default rates over all have nearly doubled, from 4.6 percent in 2005 to 2009’s 8.8 percent. Still, default rates are far from their peak in 1990, when 22.4 percent of students defaulted on their loans and the Education Department shut down dozens of programs.

The department cautioned that the actual default rate may in fact be higher, because many colleges encourage their students to seek forbearance or defer payments rather than go into default. While that sometimes can help students repay their loans, in many cases it just delays the default beyond the two-year window, Kvaal said. The Project on Student Debt called Monday’s figures “the tip of the iceberg,” noting that most defaults occur after two years.

Next year, the department will begin using three-year default rates to evaluate programs, meaning that the rate will increase. Trial three-year default rates for 2009 will be released in spring 2012.

Five institutions, four of them for-profits, will lose eligibility for federal student loans due to high default rates: Tidewater Technical, in Norfolk, Va.; Trend Barber College in Houston; Missouri School of Barbering and Hairstyling in St. Louis; Sebring Career School, in Houston, and Human Resource Development and Employment-Stanley Technical Institute, in Clarksburg, W.V. Institutions must have default rates that exceed 40 percent in one year or 25 percent for three consecutive years to incur sanctions.