For-Profit Colleges Game Student Loan Defaults, Harkin Says

Iowa Senator Tom Harkin said for- profit colleges work to delay student loan defaults to maintain their eligibility for federal aid, which makes up as much as 90 percent of the companies’ revenue.

Harkin, a Democrat and chairman of the Senate Health, Education, Labor and Pensions committee, released e-mails at a hearing in Washington in which for-profit college employees celebrated their success in pushing back student defaults.

To qualify for federal student aid, schools must show that former students’ default rates don’t exceed limits set by the Education Department during the first two years of required repayment. For-profit colleges deliberately delay student defaults to comply with the rules, Harkin said. In an internal e-mail released by Harkin, an employee of Washington Post Co. (WPO)’s Kaplan Higher Education business reported that an unemployed student signed a forbearance agreement that prevented default.

“Woohoo!” said the e-mail, whose author’s name was redacted by the committee. “One more student off the delinquency report.”

The hearing was the fifth in which Harkin has examined business practices at for-profit colleges, where student loan default rates are about double those at public universities, and three times the rates at private nonprofit institutions. Internal e-mails from Apollo Group Inc., owner of the University of Phoenix and the biggest U.S. for-profit college, released at the hearing today suggest less than half of student loan defaults occur in the first three years of repayment.

Skilled in Manipulation

“Some for-profit schools have become skilled in manipulating their default rates,” Harkin said. “Managing cohort default rates merely delays default for some students and can result in a higher debt when the default occurs.”

The Education Department is preparing to track student loan defaults over three years, rather than two, to pick up the delayed ones. The department should track defaults even longer after graduation, said Pauline Abernathy, vice president of the Institute for College Access & Success, an Oakland, California- based nonprofit research and advocacy group.

“Clearly more needs to be done to hold schools accountable,” Abernathy said at the hearing.

The Bloomberg U.S. For-Profit Education Index of 13 companies, including Apollo Group Inc. (APOL), soared 12 percent on June 2, the most in six years, when new student aid rules were published with changes from an earlier version that favor the for-profit college industry. The index slipped 0.3 percent at 4 p.m. New York time today.

Quicker Action

Education Secretary Arne Duncan was expected to testify at the hearing until yesterday, when he said he was recuperating from back pain and would send undersecretary Martha Kanter in his place. Committee Republicans, led by Wyoming Senator Michael Enzi, boycotted the meeting.

The changes in the rules, called “gainful employment,” postpone the Education Department’s harshest sanctions until 2015, while the version released last year would have cut off federal aid to programs with high default rates and low student incomes beginning in 2012. Quicker action is needed to protect students and taxpayers from predatory programs, Harkin said.

“I’m alarmed that we aren’t doing more to look ahead and say, wait a minute, we’ve got to do something now,” Harkin said to Kanter.

The regulations are designed to encourage for-profit colleges to reform their practices and only cut aid eligibility for the worst-performing schools with the highest debt and default rates, Kanter said.

“We want the sector to succeed,” she said. “That’s one of the fundamental tenets of the rules.”

Affordability Center

The department is preparing more initiatives to help students shop for high-quality programs while incurring less debt, Kanter said. The agency will issue guidance for for-profit colleges to design programs that allow students to monitor courses without incurring debt before signing up, she said.

Phoenix-based Apollo and the Washington Post Co.’s Kaplan Higher Education business have begun such programs. Apollo fell 14 cents to $44.57 on the Nasdaq Stock Market. Washington Post gained $5.28 to $423.98 in New York Stock Exchange composite trading. Corinthian Colleges Inc. (COCO) fell 20 cents, or 4.1 percent, to $4.69 on the Nasdaq.

The Education Department will also unveil a College Affordability and Transparency Center later this month to give students more information about educational program prices, Kanter said. More information for students, along with the threat of the loss of government funds, will encourage for- profit colleges to reduce student debt, she said.

High Tuition

“These steps will help ensure that students at these schools are getting what they pay for: solid preparation for a good job,” Kanter said

The Education Department’s gainful-employment rules require for-profit colleges to hit benchmarks for loan repayment and graduates’ incomes to qualify for federal student aid, which represents as much as 90 percent of the colleges’ revenue.

The industry fought the rules with a $6.6 million 2010 lobbying campaign. Harris Miller, president of the Association of Private Sector Colleges & Universities, said last week his for-profit college trade group might file suit to block the rules.

For-profit colleges’ tuition rates and internal lending programs contribute to their students’ debt and default rates, Harkin said. An associate’s degree in business from Corinthian’s Everest College in Florida costs $46,792, compared with about $6,453 for the same degree from Miami Dade College, Harkin said. Santa Ana, California-based Corinthian charges students 18 percent interest for loans, and expects as much as 55 percent of students to default, he said.

‘Ruined Credit’

“The student has no idea that they’re more likely to end up with ruined credit than a college degree,” Harkin said.

Corinthian began lending money to students in 2008 during the financial crisis when loans from other sources were unavailable, said Kent Jenkins, a Corinthian spokesman. While the company initially charged 18 percent, for about the past year it applied the same rate used by the federal government for Stafford loans, which is less than 7 percent, he said in a telephone interview.

“This was not conceived as a profit center and we do not view it as a profit center,” Jenkins said. “It was a response to the economic crisis. It is an enterprise we want to get out of as soon as we can.”

Corinthian’s default rate for the two-year cohort entering in 2009 was more than 21 percent and will be 9 or 10 percent for the 2010 cohort, Jenkins said.

$10.50 an Hour

Eric Schmitt said that he graduated from the Post Co.’s Kaplan University in 2004 with an associate degree in paralegal studies. Unable to find work at first, he took further courses from Kaplan that brought his student loan debt to $45,000, while the only work he has been able to find pays him $10.50 an hour as a janitor, he said at the hearing.

Schmitt received and took a job offer from a law firm where he performed an externship he obtained through Kaplan, the company said today in a statement. While he later resigned from the job, he cited the externship as a beneficial part of his education at Kaplan in an evaluation, according to the statement.

Harkin cited Kaplan as having taken “interesting steps” to accurately inform students about the cost and quality of its programs.

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

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

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