For-Profit College Defaults Jump to 25% as Rule Looms

Students at for-profit colleges defaulted on federal loans at a 25 percent rate, more than three times the rate at private, nonprofit colleges, according to data released today by the U.S. Department of Education.

Corinthian Colleges Inc. and Washington Post Co.’s Kaplan Higher Education unit had campuses where the default rate exceeded 30 percent, which may trigger the loss of student aid under rules that take effect next year, the data show. Colleges where more than 30 percent of students default during the first three years they’re required to make loan payments may lose their eligibility for U.S. student aid.

For-profit colleges received about $32 billion last year in federal financial aid, accounting for as much as 90 percent of the education companies’ revenue. The 25 percent default rate, an increase from 21 percent reported in 2009, presents a “troubling picture” for students at for-profit colleges, said Senator Tom Harkin, chairman of the Senate education committee. The Iowa Democrat has said he will propose legislation to further restrict grants and loans to the industry.

“Students who attend for-profit colleges are dramatically worse off after they leave than students at private or public nonprofit schools,” Harkin said in an e-mail.

Greater Default Risk

For-profit colleges serve low-income students who depend upon loans to pay tuition, and are at greater risk of default than students at other types of schools, Harris Miller, president of the Association of Private Sector Colleges & Universities, a Washington-based industry group, said in a telephone interview.

“If the department wants to be reasonable and fair, they have to look at default rates based on student demographics rather than on the institution’s tax status,” Miller said.

The Education Department currently bases aid eligibility on the percentage of students who defaulted over the first two years of required repayment. The department will begin monitoring three-year default rates next year and will base enforcement on these figures starting in 2014. The data will provide a more complete picture of students’ ability to repay their government debt, said Deborah Cochrane, program director of the Institute for College Access & Success, a student advocacy group based in Oakland, California.

The default rates released today, which cover the three years ended in 2010, are preliminary and intended to show colleges where they can improve, Education Department officials said in a briefing with reporters yesterday.

‘Major Investment’

Campuses representing almost 92 percent of Santa Ana, California-based Corinthian’s enrollment are at or above the 30 -percent default threshold, Jarrel Price, an analyst with Height Analytics in Washington, said in a client note, citing the government data. Institutions representing 81 percent of Kaplan’s enrollment exceeded that benchmark, he said.

A Texas campus of Corinthian’s Everest Institute had a three-year default rate of 57.7 percent, the Education Department’s report said. A Corinthian-owned WyoTech campus in California had a 44.6 percent rate, the report said. A Washington Post Kaplan Career Institute in Massachusetts reported a 37.5 percent rate, and a Kaplan Career Institute in Ohio registered 39.5 percent, according to the government.

“We have made a major investment in default management and we recently reported that it has had a significant positive effect,” said Kent Jenkins, a spokesman for Corinthian, in an e-mail.

Default Management

Jack Massimino, Corinthian’s chairman and chief executive officer, said Feb. 1 that the company had expanded its default management program and that, while three of its campuses had earlier been at risk of losing aid eligibility under current government rules, none are now in that condition.

The government data don’t predict what the actual default rates will be when the new rules go into effect, said Mark Harrad, a spokesman for Kaplan. Kaplan has plans to improve its default rates before the new rules become official, he said. Kaplan’s default rate reflects the socioeconomic background of its students, he said.

None of the campuses of Phoenix-based Apollo Group Inc., the biggest education company and the operator of the University of Phoenix, are in danger of violating the loan-default limit, Price said.

Improving Degree Completion

The data confirm the need for initiatives designed to improve degree-completion rates at the University of Phoenix, such as a new orientation program that lets students sample classes before enrolling, Mark Brenner, an Apollo senior vice president, said in a statement.

Corinthian, which operates 122 campuses, fell 30 cents, or 5.8 percent, to $4.79 at 2:41 p.m. in New York time in Nasdaq Stock Market composite trading. Apollo declined 35 cents to $42.05. Washington Post, the third-largest chain by enrollment, declined $10.10, or 2.3 percent, to $432.55 in New York Stock Exchange composite trading. The Bloomberg U.S. For-Profit Education Index of 13 companies retreated 1.8 percent.

The three-year default rate for all colleges was 14 percent, according to the Education Department. The rate of defaults at for-profit colleges was more than twice the 11 percent rate at public non-profit colleges and three times that at private, nonprofit colleges, which had a default rate of 7.6 percent.

Starting in 2014, colleges that have three-year default rates of at least 30 percent for three consecutive years, or 40 percent in any one year, would lose federal funds under the law passed in 2008.

To contact the reporters on this story: John Lauerman in Boston at jlauerman@bloomberg.net; John Hechinger in Boston at jhechinger@bloomberg.net

To contact the editor responsible for this story: Jonathan Kaufman at jkaufman17@bloomberg.net

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