Student Loans : Default Tied to Business, Beauty Study

The Webster Career College in downtown Los Angeles invites students to “step into a brighter future” by enrolling in brief vocational courses.

A private, profit-making school, Webster offers six-month courses in typing, data processing or clerical accounting at a cost of $3,950 per session. Practically all the students get federal loans to cover the cost.

But upon leaving Webster, 61% of them begin their business careers by defaulting on the government-backed loans.

The soaring cost of unpaid student loans--now $1.2 billion a year--regularly prompts questions as to why so many university students, and even graduates of medical and law schools, default on their loans.

Small Percentage

But in fact, they rarely do. In California, less than 8% of students from USC, UCLA and the University of California, Berkeley, who get federally subsidized loans stop paying them back. At the Stanford University School of Medicine, only 1.2% of the students have defaulted.

However, for students who enroll in private business colleges and beauty academies, default rates above 40% are common.

And nearly one-third of the students at California’s community colleges who take out the federal loans end up defaulting on them. Despite tuition charges of only $100 a year at the junior colleges, most students take out the $2,500-a-year maximum.

Officials in charge of administering the federally guaranteed student loans say a small percentage of schools--typically those with virtually no admission standards and with high dropout rates--account for most of the defaults on student loans. But those same officials say they cannot do anything about removing such schools from the program.

“We can make them jump through a few administrative hoops,” said Greg Gollihur, director of legislation for the California Student Aid Commission. “But unless they are really abusing the program or committing some sort of fraud, there’s nothing we can do.”

“It’s a national scandal,” said Terry Hartle, an education expert at the American Enterprise Institute in Washington. “Congress has never been willing to see a school kicked out of the program, and until the states can do that, I don’t think they can really bring down the default rate.”

The guaranteed student loan program, the largest and fastest-growing source of aid for higher education, was designed to get money into the hands of students quickly and with a minimum of restrictions.

Even its harshest critics agree that it has succeeded in that goal. In 1984, $7.9 billion in guaranteed student loans were issued, up from $1.6 billion in 1977.

Loans in California

In California, 267,000 student loans totaling $717 million were given out last year, four times greater than the amount in 1980.

Students merely have to certify that they are earning less than $30,000 a year and are enrolled in six units of study--essentially two courses--in an accredited school or college.

Students do not even need a high school diploma to get a loan for higher education. The school is required only to certify that the student has “an ability to benefit” from the courses.

“Since the answer to that question (whether a student can benefit) directly affects the school’s cash flow, they don’t screen out too many,” said Richard Hastings, a U.S. Department of Education official in charge of student loans.

Money for ‘High-Risk’ Students

Though defaults are troubling, most Washington education lobbyists say they are an inevitable part of a program designed to get money into the hands of “high-risk” students.

“Defaulters are primarily poor kids who are trying to improve their lot. Congress wanted to give them an opportunity, and it’s true--they are going to have a higher default rate,” said Charles Saunders, vice president for government relations of the American Council on Education, a Washington lobby group for higher education.

Congress has been at work this spring on reauthorizing the Higher Education Act and, as Saunders noted, neither the House nor Senate has suggested “any dramatic changes” in the law to bring down the default rate.

Both the schools and the banks support the program as it is, because neither suffers when students default. The federal government pays the tab for unpaid loans.

A government-subsidized loan “is really easy to get, and it’s a lot of money,” said Major Thomas, assistant dean of academic affairs at Los Angeles Southwest College, where 49% of the students who have gotten the loans have defaulted.

Pocket Money

Since the community colleges charge only $50 per semester in fees, students can, in effect, pocket most of the grant money. Some students are said to use the loans to buy cars and, as Thomas noted, “That would be a legitimate expenditure because you need a car for transportation. You don’t have to say how you are going to use the money, as long as it is in pursuit of an educational objective.”

At the privately run business and beauty colleges, students typically need a loan, in combination with a federal or state grant, to cover the cost of tuition.

In interviews, school officials condemned students for defaulting on the loans and said they do not understand why so many of them quit paying.

“I’m dealing with people on the lower rungs, people who are seeking entry-level jobs,” said Edmund Lau, director and co-owner of the Webster Career College in Los Angeles, whose students have accounted for more than $5 million in loan defaults. “They are economically strapped, which is not an excuse for not paying back the loan. But I don’t have any other explanation of why our default rate is so high.”

Other school officials said students know they can get away with not paying back the loan. Recently, California officials have begun turning over the names of defaulters to credit bureaus, and earlier this year, Education Secretary William J. Bennett announced that his office would send the names of defaulters to the Internal Revenue Service. But so far, most student loan defaulters have escaped harsh penalties.

“I’ve heard students make the statement that ‘Jane Doe didn’t pay back her loan, so why should I?’ ” said Mark Gross, a manager and part-owner of Richard’s Beauty Colleges, some of whose branches in Los Angeles and Orange counties have default rates as high as 60%. “If you knew all your friends didn’t pay and got away with it, you would rationalize it and not pay either.”

Something for Nothing

“In this area, people are used to getting something for nothing,” said Hyacinth Gordon, owner of the Compton Beauty College, where 66% of the students have defaulted on their loans. “Some of them are working. They promise they will pay and then they don’t. Some move away and I can’t find them.”

Gordon said she makes an extraordinary effort to persuade her students to pay back their loans. “I call them, I write them, I even send them telegrams. I pray that the kids will do better, but it’s hard to track them down,” she said.

Still, owners of the colleges reject the idea that their schools should be penalized for the high default rates.

“What does the school have to do with the loan default rate? That loan is made to the student, not the school. It is a commitment between the bank and the student,” said Gross of Richard’s Beauty Colleges. “We meet the standards of the program. We are audited all the time. But we can’t be in the collection business.”

Some school owners put the blame on the banks.

Banks Cannot Lose

“There’s a tremendous market for the banks. They make a lot of money on this program. The loans are guaranteed, so they can’t lose,” said one school owner, who asked not to be identified.

However, bank officials say they give loans only to students certified by the schools, and in fact, never see the students.

“I personally don’t talk to the students,” said Connie Bernabei, a loan officer for First Independent Trust in Downey, which handles loans for students at Webster College. “We deal with the school and answer any question they have about the applications. But we don’t deal with the students. It’s up to schools how they handle the program.”

Recently, the U.S. Senate Labor and Human Resources Committee briefly considered, and rejected, an amendment that would have required banks to have at least a three-minute interview, in person or by phone, with a student applying for a guaranteed loan.

Bank lobbyists strongly opposed the change, telling committee members that because of the huge volume of student loans, “they were unable to offer that service,” said Susan Franson, an aide to Sen. Robert Stafford (R-Vt.), sponsor of the unsuccessful amendment.

With other loans, bank officials are concerned whether the borrower can and will repay the money. Not so with the guaranteed student loans.

No Student Restrictions

“We don’t set any restrictions on the students. That’s because our president is really gung ho on education,” Bernabei said. “Some of the big banks didn’t want to deal with the schools that had horrendous default rates, but we said we would. Our president, Deano Evangelista, feels education is really important.”

State officials suggest other reasons for First Independent Trust’s interest. The bank and its president are familiar names to officials at the state Student Aid Commission.

“Deano’s made a fortune on student loans,” said Gollihur, the commission’s director of legislation. “They really market student loans. They set up booths at all the college meetings saying that everybody can get a student loan.”

The banks charge 3.5 percentage points above the prevailing Treasury bill rate. They also get a 5% fee for issuing each loan. “There’s also not much cost involved for them. They can send out a few notices, make a few phone calls and then turn over the loan for repayment” if a student defaults, Gollihur said.

Although state student aid officials are frustrated by their lack of legal authority, the newly appointed head of the California Student Aid Commission says he plans to crack down as much as possible on loan defaults.

“We have an appalling situation: $300 million in defaults,” said Samuel Kipp, who took over as the commission’s executive director in January. “It’s not going to be business as usual for us,” he said, referring to complaints in Sacramento that previous student aid officials were too protective of the schools and the banks participating in the program.

“Whether it is the schools, the lenders or the students, they all have a role to play in this problem. We cannot tolerate a situation where the availability of loan funds for the majority of students is jeopardized by the actions of a few.”

First School Kicked Out

On Jan. 30, Kipp announced the first school in California to be kicked out of the loan program. The Academy of Stenographic Arts in San Francisco, a privately owned secretarial school, was dropped because, among other things, school officials had not refunded tuition to students who withdrew soon after enrolling.

Students who have defaulted may begin feeling more pressure to repay. Their names will be turned over to credit bureaus and to the state tax board, which can withhold any tax refunds. Kipp also announced a series of stepped-up reviews of schools with default rates above 30%. Among California’s state universities, only two have default rates above 20%--California State University, Los Angeles, at 22% and California State University, Dominguez Hills, at 21.6%.

Under federal regulations, the state commission cannot drop a school simply because it has a high default rate, but it can set more stringent administrative rules for these institutions. For example, schools where more than 30% of the students default could be required to file progress reports on students as often as four times a year. Officials say the school’s default rate is usually closely tied to its dropout rate.

“When you see a high default rate,” Kipp said, “you can guess one of two things is true: Either there is no screening--no admissions standards--or the quality of instruction is poor once they get there. Or it could be a combination of both.”

Students who drop out often find themselves with no job, but with a $50-a-month repayment on a student loan.

One-Third Dropout Rate

Officials at Webster College say about one-third of students there drop out. Lau adds, however, that “90% of them get jobs when they graduate.”

Les Cochren, one of only three state compliance officers who monitor the nearly 1,000 California schools giving out the government-backed loans, said he visited Webster in December, 1984, and found it “administratively sharp. Their files were in order, and there were no major program abuses.” State officials also said they had heard few complaints from students of Webster.

But, asked to comment on the quality of the program, Cochren said he had real reservations about it. “They have a lot of problems there. They are trying to reach a certain group of students who don’t have access to higher education. They appeal to education as status, as a key to upward mobility. They say you can get a degree in eight months rather than going two years to a community college,” Cochren said. “But they are not really preparing them for the workplace. They don’t gain enough skills to be able to go out and get a real job.”

The percentage of students who quit paying on loans is not a part of the compliance review, Cochren said. However, “A high default rate is an indicator of something. It usually means the student is disenchanted with the experience, and hasn’t gotten a job out of it.”

In Washington, neither the House nor Senate education committees have made any changes in the law that will affect schools with high default rates. Education Secretary Bennett had proposed that students be required to have a high school diploma before they could get a college loan, but both committees rejected that idea.

The Senate version of the bill would reduce federal reimbursements to state agencies, such as the California Student Aid Commission, if the default rate is above 10%.

“California doesn’t have a great record on loan defaults, so this might have an impact,” said Franson, the Senate committee aide.

But state officials say Congress has given them little authority to reduce defaults. Simply cutting the federal reimbursement rate will leave state taxpayers holding the tab, they said.

IRS Could Help

Turning over the names of defaulters to the IRS, as proposed by Bennett, “may solve a public relations problem: the doctor driving a Mercedes who refuses to pay back his loan.” But it won’t have much effect on the biggest group of defaulters, poor students, said Saunders, the higher education lobbyist.

The education groups, meanwhile, oppose more stringent measures.

“It doesn’t make any sense to crack down on the institutions and say they can’t have any more money,” Saunders said. “That would just foreclose the opportunities for other needy students to get an education.”

Hastings, the Education Department official, said he would like to see some more tightening of the program, but also doubted Congress would go far in that direction.

“You can say Myrtle’s Beauty School has a problem because 60% of their students default. But they (students) may have had a bad secondary education and this is their last fling,” he said. “Congress has decided we ought to give people the opportunity to go as far as they can go, and that means taking some risks.”

STUDENT LOAN DEFAULTS AT CALIFORNIA SCHOOLS

DEFAULT RATES BY TYPE OF SCHOOL Schools Gross Default Rate University of California (10) 7.6% California State University (20) 12.8% Community College (106) 31.6% Independent Four-Year Colleges (138) 10.3% Vocational Schools (311) 29.8% Independent 2-Year Colleges (21) 16.9% Hospital Schools (21) 8.4% Out-of-State Schools (1,312) 9.7% Totals 16.6%

SCHOOLS WITH STUDENT LOAN DEFAULT RATE ABOVE 40%

Loan School City Default Rate Adelphi Business College Los Angeles 49.9% Bailie School of Broadcasting San Francisco 46.2% Cal Hair Design Academy San Francisco 46.9% Cal Pacific College San Francisco 47.3% Cal Paramedic and Tech. College Long Beach 40.5% Casa Loma College Lake View Terr. 42.0% College of Alameda Alameda 45.7% Compton Beauty College Compton 66.6% Compton Community College Compton 49.6% Continental Beauty Academy San Fernando 42.3% Dalenas College of Beauty Two Fresno 41.2% Dickinson-Warren Business College Berkeley 45.3% Estelle Harman Actor’s Workshop Los Angeles 50.7% Imperial Valley College Imperial 49.5% Lakewood Beauty College Long Beach 57.6% Leimert Park Beauty College Los Angeles 45.9% Long Beach College of Business Long Beach 48.6% Los Angeles Southwest College Los Angeles 49.2% Los Angeles Trade Tech College Los Angeles 41.2% Los Medanos College Pittsburgh 56.9% Lyle’s Tulare College of Beauty Tulare 58.9% Marinello School of Beauty West Covina 61.4% Mendocino Community College Ukiah 44.5% Merced College Merced 44.6% Modern Beauty Academy Los Angeles 43.4% Panorama City 42.0% Moler Barber College Sacramento 41.5% Newberry School of Beauty Hollywood 47.6% North Park Beauty College San Diego 45.0% Oakland College of Dent./Med. Asst. Oakland 41.7% Pacific Beauty College 2 Los Angeles 46.3% Pacific Beauty College 3 Los Angeles 68.4% Paris Beauty College Concord 52.0% Richard’s Beauty College Ontario 47.0% Huntington Beach 48.6% Pomona 60.9% Riverside City College Riverside 40.6% San Diego City College San Diego 47.5% San Diego Technical Inst. San Diego 46.6% San Gorgonio Beauty College Banning 46.5% Sierra College of Beauty Merced 53.5% South Bay College Hawthorne 47.8% Southland College of Med./Dent. Los Angeles 42.7% Super Shapes College of Cosmetics Oakland 51.0% United College of Business North Hollywood 41.0% Universal College of Beauty Los Angeles 46.9% Valley Vocational Center La Puente 43.1% Webster Career College Los Angeles 61.8% West Los Angeles College Culver City 40.2% Willow Glen Beauty College San Jose 45.9%

Source: California Student Aid Commission