In examining the student loan default rate data that the U.S. Department of Education recently released, it’s hard not to marvel at the success that Corinthian Colleges has had in driving down its schools’ two-year cohort default rates.
The for-profit higher education corporation’s two-year rates have plunged across the board, with most of them dropping by double digits. For example, the company’s Everest College campus in Thornton, Colorado saw its rates plummet, from 27.3 percent in 2009 to 3.7 percent in 2010.
Similarly, at Everest Institute in Pittsburgh, the rate dropped from 25.2 percent to a remarkably low 1.1 percent. [The company has been much less successful in lowering its schools’ 3-year default rates. Those were 34.9 percent at the Thornton campus and 28.6 percent in Pittsburgh. But the government won’t start holding schools accountable for these rates until 2014.]
How did Corinthian’s leaders achieve this remarkable feat?
Did they do it by:
A. Radically improving the quality of the programs their schools offer to ensure that their graduates have the skills they need to obtain gainful employment in their fields of study?
B. Slashing prices so that students don’t have to take on so much debt?
C. Overhauling their schools’ recruiting practices to ensure that they enroll only students who they know can succeed in their programs?
The correct answer is “none of the above.” Instead, as the Senate Committee on Health, Education, Labor and Pensions has documented, Corinthian officials have engaged in a no-holds-barred campaign to drive down their schools’ rates by pushing former students to obtain temporary forbearances and deferments on their loans. The company’s sole purpose has been to prevent these borrowers from going into default during the current two-year window when the Education Department holds schools responsible for their rates.
As long as borrowers are in deferment or forbearance, they are not required to make payments on their loans and are not in danger of defaulting. Yet federal law mandates that the Education Department include such borrowers among those who are successfully repaying their loans in the default rate calculation. As a result, colleges can artificially lower their rates by persuading their former students to take advantage of these options.
And while this may look like a win-win for both the company’s schools and their former students, that’s not the case for many of these borrowers. While putting federal student loans into forbearance allows borrowers to stop making payments temporarily, interest continues to accrue on the loans, ballooning the size of the overall debt load. The same goes for deferments on unsubsidized federal loans. Many of these borrowers could be better off making graduated or extended repayments, consolidating their loans, or entering into the Income Based Repayment Program, which would allow them to pay back their debt as a percentage of their income.
Corinthian hasn’t exactly kept its efforts secret. In fact, company officials have been quite open about their intentions with investors. But they haven’t revealed much about how they put their plan into action. So how did they do it? The answer can be found in the report (see pages 181-184) that the Senate HELP committee released in July on its investigation into the for-profit higher education industry. Citing internal company records that the committee obtained from Corinthian, the report shows the extraordinary lengths that Corinthian has gone to achieve its aim:
To accomplish a lower reported default rate, Corinthian hired three contractors. One was General Revenue Corporation, which devoted 60 full-time employees to call former Corinthian students who were late making payments but not yet in default. The company also hired two firms, ROI and TEAM Enterprises, to send out 30 or more people to knock on former students’ doors to secure ‘cures.’ This same document reveals that students in late stages of delinquency but not yet in default -- a period during which they are the biggest threat to Corinthian’s default rate – could be contacted up to 110 times per month. Another internal document shows that, in order to achieve the company’s desired default rate, the call center run by General Revenue Corporation would make between 2 and 2.5 million calls a year, or 429 calls per employee per day to former Corinthian students. [Emphasis added]
Corinthian also built its own internal default-management operation, complete with a call center and dozens of employees. Documents show that the default-management operations at Corinthian are run with the same high-pressure sales environment as the recruiting department. Compensation is directly tied to the number of students an employee successfully eliminates from the company’s default rate.
As part of these efforts, Corinthian started offering former students gift cards to McDonald’s to get them to contact the call center. According to the report, the company made this offer “by e-mail and mobile phone text messages, and the messages explicitly referred to postponing student loan payments.” Meanwhile, employees who met their targets were showered with praise, while those who failed were taken to task:
E-mails show that managers pushed employees to secure as many ‘cures’ as possible. “Team Central…you did it!” reads one e-mail sent to dozens of line-level default management employees, “We cured 243 students on Wednesday…our Division is leading [Corinthian Colleges] and that is a direct reflection of your daily efforts to drive down our CDR [cohort default rate].”
In addition to this message of encouragement, other e-mails demonstrate a willingness to reprimand employees if targets are not hit:“Tuesday saw the lowest number of staff calling in the past several days. This led to less calls and less students we talked to. We all know two truths: This must be a campus-wide effort and this is definitely a numbers game.”
A numbers game, indeed. By pushing former students to get forbearances and deferments on their loans, Corinthian has been able to artificially lower its schools’ rates and make sure that these institutions continue to receive hundreds of millions of dollars in federal student aid funds each year.