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Rise in student loan defaults driven by for-profit colleges, study says

 Rise in student loan defaults driven by for-profit colleges, study says
Everest College in Alhambra, one of the Corinthian Colleges, a Santa Ana company that was once one of the nation's largest for-profit college chains, announced in April that it was shutting down its remaining two dozen schools -- a move that left 16,000 students scrambling for alternatives. (Al Seib / Los Angeles Times)

The recent rise in student loan defaults has been driven mostly by the increase in those attending at for-profit colleges who left school in a tough economy with debt that outstripped their earnings potential, a new study has found.

The study, the first to match loan data with tax information from individual borrowers, found that students at community colleges also contributed to the big increase in loan defaults, a problem that has drawn the attention of federal officials and presidential candidates.

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About 70% of students who left school in 2011 and defaulted two years later had attended for-profit institutions or community colleges, according to the study by Adam Looney, deputy assistant Treasury secretary for tax analysis, and Constantine Yannelis, a Stanford doctoral student.

Those students made up only about half of all people with outstanding student loans.

"They borrowed substantial amounts to attend institutions with low completion rates and, after enrollment, experienced poor labor market outcomes that made their debt burdens difficult to sustain," according to the study, which was presented Thursday at a conference at the Brookings Institution think tank.

About 21% of those borrowers who were required to start repaying their loans in 2011 had defaulted within two years, the researchers found. The figure was 8% for undergraduate borrowers from four-year public and nonprofit private schools, a group that has continued to have low default rates despite the Great Recession and its aftermath, the study found.

Total outstanding student loan debt increased 76% to $1.2 trillion from 2009 through last June, according to Federal Reserve data. Overall default rates have risen to 11.5% from 7.9% during the period, while rates for mortgages and credit cards have declined in recent years.

Eight of the 10 schools whose students had the most total debt in 2014 were for-profit institutions, led by the University of Phoenix with $36 million. In 2000, only one of the top 10 was a for-profit school, the study said.

Mark Brenner, a spokesman for Apollo Education Group Inc., which operates the University of Phoenix, said the school works to help students borrow responsibly.

"These researchers failed to acknowledge our students' significantly improving rate of default due in part to University of Phoenix support systems and services designed for working adult students," he said.

The default rate for students who left the school in 2012 was 13.6%, he said.

Looney and Yannelis said the high default rates aren't likely to continue because the surge in students caused by the tough labor market of the Great Recession has eased and there has been "increased scrutiny and policing of for-profit institutions."

Corinthian Colleges, a Santa Ana for-profit operator, closed its campuses in April and later filed for bankruptcy protection amid an investigation by the Department of Education into falsified job placement rates.

From 2010-14, the number of new borrowers decreased 44% at for-profit schools and 19% at community colleges, the study said.

But because of the long life-cycle of student loans — the standard repayment period is 10 years and that can be extended — it will take a while for default rates to drop, the study said.

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