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Defaults on U.S. Student Loans Rose in 2008 Crunch

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 overall 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.”

Stock Prices

Education Management Corp., based in Pittsburgh, fell 6 cents, or less than a percent, to $9.10 at 4 p.m. New York time in Nasdaq Stock Market composite trading. Washington Post Co., operator of the Kaplan education business, fell $3.15, or less than a percent, to $375.88 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 increase in default rates at for-profit colleges showed the effects the economy on low-income students, said Harris Miller, president and chief executive officer of the Career College Association, a Washington-based industry group.

Studies show that “individuals with fewer financial resources have a harder time repaying loans, whether in private sector colleges and universities, community colleges, or other types of higher education institutions,” Miller said today in an e-mailed statement.

President Barack Obama’s administration is toughening standards for aid eligibility 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.”

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