Student Loan Crackdown Tied to High Default Rate

State-administered federal student loans will be granted only as a last resort, and schools will undergo reviews and have to comply with stricter regulations in state efforts to reduce the high default rate at many smaller colleges and trade schools, it was disclosed Tuesday.

Under regulations being formulated by the California Student Aid Commission to govern its Guaranteed Student Loan program, a student will no longer be able to obtain all of his loan in one check, a school will be subject to an extensive review of its loan approvals if its default rate exceeds 12%, and a school may be suspended from the program if the default rate reaches 30%, said Lois McNally, a commission spokeswoman.

The high default rate is the result of an increasing number of vocational school students who withdraw from school upon receiving their loan checks, said Rick Reinhardt, associate director of the commission.

The average default rate for the state’s 417 vocational schools and community colleges is 12%; 55 of the schools have default rates above 30%. The 210 four-year colleges have maintained an average default rate of between 5% and 10%, Reinhardt said.

The regulations are still being refined, but they are expected to go into effect before the end of the school year. They are intended primarily to reduce the number of high-risk loans in urban schools, which have the highest loan default rates, he said.

The highest loan default rate in the state--67.8%--is at Pacific Coast College in Los Angeles. San Diego Community College, at 40.7%, has the second highest, according to Reinhardt.

By comparison, the default rate at the four-year colleges in San Diego ranges from 6.7% at UC San Diego to 9.5% at San Diego State University.

McNally said that, in an effort to assist schools in the collection of debts, the commission will provide administrators with the names of defaulters at their institutions.

“We are asking schools to aggressively help us get repayment of loans,” she said.

The maximum amount that can be borrowed under the Guaranteed Student Loan program is $2,500, and the average amount defaulted is $2,300, McNally said.

In default cases, the commission pays the claims and is later reimbursed by the U.S. Department of Education.

Len Steinbarth, president of the California Hair Design Academy in San Diego, which has a 43.1% loan default rate, one of the state’s highest, said the claims of the commission are “bogus” and that the new regulations would only limit access to schools.

“Many of my students--80%--would not be able to make it through the 10-month program without the assistance,” he said. “Many of them are defaulting because they are not able to pay back the loans yet. I doubt that but a few of them are defaulting purposely.”

Marcelino Cuellar, dean of student affairs at San Diego City College, said he has no record of the number of students who withdraw shortly after receiving their checks. But, he said, defaults have been a continuing problem and he has established workshops this year to explain the purpose and responsibilities of taking out a loan for education.

“Many are low-income students who have never taken out a loan before,” Cuellar said. “Some are confused between a grant and a loan and do not realize that they must repay the loan. We are stressing the consequences of defaulting and offering the loans as the very last alternative.”