Schools Battle to Put Lid on Soaring Student Loan Defaults

Student loan default rates at some trade schools and community colleges have reached extraordinary levels and the rules for approving such loans are being tightened, state officials say, but they insist that the program’s overall repayment performance is not all that bad.

A report being sent to colleges, universities and schools by the California Student Aid Commission shows that more than half the state’s 410 colleges have default rates of 15% or more. A few are around 50% and more.

The recommended regulations include holding back loan checks for students at high-default schools during the first two weeks of classes to cut down on the number of students who drop out as soon as they get their money.

Releasing Them Periodically

Rick Reinhardt, associate director of the commission, said commissioners are considering the release of loans in periodic installments at all schools--including those with low default rates--rather than allowing students to draw lump-sum checks.

The staff also has recommended that schools with high loan default rates should be required to provide intense counseling during the whole loan process, making certain that students know the interest rates, repayment schedules and the consequences of failing to repay.

In addition, a student at a high-default school would be allowed to take a loan only after applying for any available scholarship or grant.

The dozen institutions leading the commission’s list have default rates ranging from more than 40% to almost 68%. Two of the 12 are community colleges, while the others are privately owned trade schools.

“The four-year colleges,” said Arthur S. Marmaduke, commission director, “are doing very well, by and large.” In the University of California system, he said, the gross default rate is less than 6%.

Default Rate of 13%

The overall gross default rate, he said, is holding at about 13%, but “we cut that in half with collections” (after the state, as the administrator of the federal funds guaranteeing the loans, takes over problem cases from the banks).

“The problem is mostly in the proprietary schools and community colleges,” Marmaduke said. “Some of the proprietary schools don’t run very good programs. They’re a little shaky. Also, many of the students tend to come from very low-income families. They don’t really understand it’s a loan. They don’t always know the difference between a loan and a grant.”

Marmaduke added: “What is an acceptable default rate? This is a federal program, guaranteed by the federal government so the banks will take risks and lend to students they wouldn’t otherwise lend to.

Always Some Risk

“This program should always have some defaults, because if you didn’t, you wouldn’t be taking any risks. You have to balance this against the students who do go to school, who do get educations and become productive members of society.

“We’re bringing down the net default rate.”

Leading the commission’s list of default rates is Pacific Coast College in Los Angeles, with 67.8%. But Paul Lehrer, executive vice president of United Education & Software, which owns the school, said the figure is wrong.

Lehrer pointed out that his organization bought the school (then called the California College of Dental Training) more than two years ago, when it did have a high default rate, and renamed it Pacific Coast College. It is now one of 12 schools in the United Education chain, which has an overall default rate of only 18%, he said.

Although he could not offer a breakdown on the default rate for Pacific Coast College because all student aid for the chain is processed as a single group, he said the figure would be “nowhere near” 67.8% and commented: “I’m winding up with a black eye from the prior ownership and the government’s inability to report their default rates correctly.”

Rates Are Cumulative

Commission spokeswoman Lois McNally, though, said the default rates are cumulative--taking into consideration all the students who have defaulted at a particular school since the state began administering the program in 1979. The commission, she added, feels that a new owner should be responsible for helping to collect on the old loans.

Second on the list is the Webster Career College in Los Angeles, with 61.2%. A college spokeswoman said she could not say whether the figure was correct.

Next was the International Career Academy in Van Nuys (now closed) with 53.7% , followed by Universal College of Beauty in Los Angeles with 49.3%

Ranked 10th is Los Medanos (Community) College in Pittsburg with a 44.4% rate. San Diego City College is 12th with a 40.7% default rate.

Reasons for Suspension

Under current federal regulations, according to Marmaduke, the state cannot suspend a school from the Guaranteed Student Loan Program simply because it has a high default rate. It must find something else wrong--either malfeasance or slipshod management.

“If they’re accredited,” he said, “they’re in the program. We can’t refuse to lend to their students.”

He noted that this is only the sixth year in which the state has administered the Guaranteed Student Loan Program, which means that only during the last two years or so have California officials begun to see default patterns as loans became due.

Whether the rules will change by next semester is not clear. Once the schools respond to the notifications of their default rates and to the suggestions for change, an advisory group of school financial aid officers and representatives of lending agencies will pass its own recommendations on to the commission.