U.S. Student Loan Defaults Rose to 7% in 2008, Led by For-Profit Colleges

The default rate on U.S. student loans rose to 7 percent in the year ended Sept. 30, 2008, as the economy worsened globally, according to the most recent Education Department data.

The for-profit college sector had the highest default rate, rising to 11.6 percent, the department said today in a statement. The annual rate of student-loan defaults climbed from 6.7 percent in the same period a year earlier, according to the statement.

The Education Department yardstick measures the percentage of borrowers who default during the first two years of required repayment. The measurement is used to determine which schools will remain eligible to participate in U.S. student aid programs. Default rates among for-profit college students were almost twice the 6 percent found at public nonprofit colleges and almost three times the 4 percent rate at private nonprofits, according to the statement.

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

Education Management Corp., based in Pittsburgh, fell 21 cents, or 2.3 percent, to $8.95 at 10:36 a.m. New York time in Nasdaq Stock Market composite trading. Washington Post Co., operator of the Kaplan education business, fell $9.57, or 2.5 percent, in New York Stock Exchange composite trading.

In May, the Education Department released preliminary figures on default rates. Today’s official release shows little change in the overall numbers.

The Obama administration is toughening its lending standards with greater scrutiny of defaults, and it’s proposing to monitor loan repayment rates and incomes among students who have attended for-profit colleges.

The default measures currently in use “fall far short of capturing the full range of defaults or distressed borrowers,” said Lauren Asher, president of the Institute for College Access & Success, an advocacy group in Oakland, California. “Right now, there’s no information that tells us whether career education programs are delivering quality training for jobs.”

To contact the reporter on this story: John Lauerman in Boston at jlauerman@bloomberg.net.

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