Dropouts, Blacks Default Most on Student Loans, State Study Shows

A report examining the causes of the high student-loan default rate in California has found that dropouts were far less likely to repay their loans than students who completed the programs they enrolled in, and that the rate of default among black students was considerably higher than that of other racial or ethnic groups.

Based on case files of 4,600 students who had fallen into default on a guaranteed federal student loan in 1982-83, the study, released to the public today by UCLA, was ordered by the Legislature in 1984 in response to reports of high default rates.

The study, titled “Whose Fault Is Default?” focused exclusively on community colleges and private vocational schools, the two categories of school where defaulted loans were most frequent.

Principally authored by Prof. Wellford Wilms of the UCLA Graduate School of Education, the study found that individual factors related to ethnicity and to the ability to complete the college program had more to do with whether a student defaulted than did actions taken by the schools to prevent non-payment.

Without being publicly released, the report was submitted to the California Student Aid Commission in April, 1986, but the commission’s executive director, Samuel Kipp, said Tuesday that he and commission members found little in the report that was useful or that “significantly contributed towards finding solutions” to the default problem.

Kipp also criticized the report’s emphasis on student characteristics over institutional factors. “The implication in the report seems to be that if you don’t loan to high-risk students, you can solve the default problem. That is not a real solution,” he said.

Wilms said the report, which cost the state $75,000, does not propose cutting off aid to any group of students but places the real blame for the high default rate--which surpasses 50% at some schools--on a loan system that makes borrowing “so easy and painless.”

The guaranteed student loan program, created in 1969, is the largest and fastest-growing source of financial assistance for postsecondary education. It was designed to help students obtain aid quickly and with a minimum of restrictions.

Under the program, administered by individual states, local banks and savings and loan firms make the loans to students and collect a fee for their service. Students agree to start repayment six months after they leave school. If a loan is in default, the federal government repays the lender and initiates efforts to collect payment from the student.

To qualify, students have to show that they earn less than $30,000 a year and are enrolled in a recognized degree or certificate program. Having a high school diploma or the equivalent is not a requirement.

Abuses of the program, particularly among profit-making vocational schools, have been documented in a number of studies.

In recent years, high default rates have drawn attention to the loan program, particularly in California, which has one of the highest non-payment rates in the nation. According to the state financial aid commission, $140 million in loans was not repaid in 1986-87. The previous year, the total was $186 million.

Wilms said in an interview Tuesday that this study was more comprehensive than previous research in the area because it weighed both institutional and individual factors.

He said the finding that individual characteristics contributed more heavily to the probability of defaulting ran contrary to the assumptions of members of the student aid commission, which he described as “the belief that somehow if these institutions (with a high number of student defaulters) did something differently or if they were simply not in the program” the default rate could be reduced.

“This study says there is an additional element here . . . that the characteristics of those students have a lot to do with whether or not they will default.”

The study found that dropping out of the proprietary or public two-year college was “the most powerful predictor” of defaulting. It suggested that students who are poorly prepared academically for higher education “may become discouraged, drop out and default on their loans.”

Wilms’ study showed that 38% of students who dropped out of school defaulted on their loans, compared with 17% of those who completed their course of study.

The second strongest predictor of default risk, according to the report, was “being black.” In its comparison of racial and ethnic groups, the study found a 36% default rate among student borrowers who are black, compared with 18% among Latinos, 16% among Anglos and 10% among Asians.

Wilms, whose primary area of research is vocational education, said he is puzzled by the high default rate of black students. He also said he would not be surprised if state policy-makers chose to ignore it entirely. “It is enormously sensitive and has any number of complicated explanations attached to it that are all speculative,” he said.

Other higher education experts contacted by The Times said the correlation between dropping out and defaulting is not surprising. Some suggested that it is a critical point and one that should result in putting the burden of responsibility for the problem on the institutions for doing an inadequate job of counseling and instruction, rather than blaming the defaulting students.

Kipp, the commission director, said that the institutions examined in the UCLA report tend to enroll a higher proportion of students who are poorly prepared for higher education. Community colleges and proprietary schools have open admissions. They also tend to enroll a greater number of minorities than do four-year institutions, he said, which may have skewed the results.

He also said he thinks the study should have included four-year colleges, where default rates are considerably lower. Such an analysis might have shed some light on the importance of counseling and other support services in determining the “default or repayment behavior of students in different types of institutions,” Kipp said.

“I tend to place less emphasis on the ethnic component than on socioeconomic factors,” he said.

Jose Robledo, director of student financial services for the Los Angeles Community College District, also was skeptical of the study’s conclusions regarding black borrowers.

“I’ve never felt . . . that it (defaulting) was a primarily black concern. I’ve always found it to be more of a low-income (problem). It’s the economically disadvantaged or educationally disadvantaged person who is the higher-risk individual. It just happens that minorities hold more than their fair share of these populations,” he said.

Patrick Callan, director of the Education Commission of the States, a nonprofit group that advises states on educational policy, said there is little good research on the cause of defaulting. He had not seen the study and would not comment on its conclusions, but said he hoped that it would result in greater attention to larger issues.

“The basic question we ought to be asking is whether part of the problem of default in California comes from an over-reliance on student borrowing as a means of financing higher education, and a system that encourages many students to borrow unrealistically,” said Callan, who formerly headed the California Postsecondary Education Commission.

Wilms’ report does offer some possible explanations for why black students may default on loans more than other groups.

“One plausible explanation is that being black stands for additional and unmeasured economic variables that are associated with default,” the study states.

Wilms said he thinks it likely that default rates are linked to the earning power of students after they leave school, but he said this was not measured by his study.

The study suggests that one way to deal with the default problem is to convert the loans into grants--a proposal not likely to win favor in the Reagan Administration, which has sought restrictions on the loans.