Schools With High Loan Default Rates Face Sanctions

The Education Department, trying to control the soaring number of defaults on student loans, threatened sanctions Wednesday against institutions with high default rates.

Any college, university or other post-secondary school that has a default rate exceeding 20% in the Guaranteed Student Loan Program by 1990 could be expelled from that program and all other federal student aid programs under the new rules.

The announcement by Education Secretary William J. Bennett was immediately criticized by trade schools, which account for most of the high default rates. However, a department official said that between 600 and 1,000 two- and four-year academic institutions also exceed the 20% rate.

50% Default Rates

About a third of the 7,295 institutions in the loan program--including many in California--now have 20% default rates, and the department said that an additional 500 schools have default rates above 50%.

Officials said that the loan defaults will cost the government $1.6 billion in fiscal 1988, which began Oct. 1--almost half of the program’s entire cost. That figure represents a 200% increase since 1983, when the figure stood at $531 million, the officials said.

At a news conference, Bennett called the expenditure “a disgraceful situation that no one, neither Congress nor the executive branch, intended. It must change.”

He said that, although the individual borrower “bears the major responsibility” for repaying the loans, the educational institutions, which help arrange the loans for their students, also are responsible.

Immediate Probe

The secretary, suggesting that some of the schools do not administer the programs properly, announced also that the department’s inspector general will immediately start an investigation of schools with rates above 50%.

In letters to college presidents, Bennett outlined a plan that defines a defaulter as someone who was supposed to begin repaying a loan in a fiscal year but has failed to do so by the end of the next fiscal year. The percentage of such students constitutes a school’s default rate.

The department will calculate every institution’s rate in December, 1989, and again a year later. Those with rates above 20% in 1990 will face immediate penalties, ranging from suspension to termination from all student loan programs, Pell Grants and work-study programs.

A state-by-state listing of institutions and their 1985-86 default rates on guaranteed student loans showed that the high percentages are concentrated among beauty schools, business schools and technical schools.

The list includes a number of traditionally black institutions. For example, Morgan State University in Maryland showed a default rate of 40.4% for 467 borrowers, and Cheyney University in Pennsylvania had a rate of 51% for 275 borrowers.

California Default Rates

In California, the default rate among the 103 borrowers at Long Beach College of Business was 60%, and the Barstow Academy of Beauty had a rate of 56% for 16 borrowers. Other California institutions included Imperial Valley College, with a rate of 45% for 24 borrowers; Riverside Community College, at 39% for 275 borrowers, and Santa Monica College, at 35% for 258 borrowers.

Ruth Goldway, director of public affairs at 22,000-student Cal State L.A., which had a 21% default rate, said:

“In general, our university services students with the greatest financial need. In that regard, we are not surprised to see that we have a higher default rate than other universities.

“One should put in perspective that the (California State University) system tuition rate is among the lowest in the nation and therefore the dollars owed by students may be less than (at) other universities.

Harm to Students Cited

“Such regulations will harm those students who most need a college education to enhance their opportunities for improvement in life. It penalizes those schools which service students from the lower economic rungs rather than schools that may be careless about their paper work in distributing financial aid.”

Thomas Donner, business manager for Santa Monica College, which has an enrollment of 20,000 and showed a 36% default rate, said:

“We don’t have control of the students when they leave us. If a student has a loan with us, and goes on to another school, he or she generally doesn’t pay us back (until the student has completed four years of college).

“I don’t see an easy solution on how it can be resolved. Maybe take the European model and send the check to the parents. They (the federal government) think the schools should be doing something to pay back the money. I don’t know what it is the schools can do to pay it back.”

Job Subsidies

He said that the federal student aid programs Bennett is threatening to cut off cover everything from tuition to living expenses and job subsidies.

Nationwide, most universities had default rates well below the national average of 13%, according to the figures.

Bennett said that he is waiting until after 1990 to take action against schools with high default rates to give them “fair warning that from this day forward” they must work harder to encourage students to repay loans.

However, Stephen J. Blair, president of the National Assn. of Trade and Technical Schools, which represents 1,200 schools with 700,000 students, complained that the new policy will ultimately deprive poor students of an education because they will not be able to get loans.

Blair complained also that the policy places an unfair burden on schools. “How do you exercise control over a student who one day just does not come to class?” he asked. “Why should the school be responsible?”

Staff writer Ronald L. Soble in Los Angeles contributed to this story.

LOAN DEFAULTS IN SOUTHERN CALIFORNIA

According to the U.S. Education Department, these Southern California colleges have a loan default rate of 20% or higher.

% of Students Borrowers in default South Bay College 52.7 1,422 Compton Community College 47.7 113 Los Angeles Southwest College 44.4 135 San Diego City College 40.5 434 Oxnard College 40.0 45 Riverside Community College 39.6 275 Santa Monica College 35.6 258 Los Angeles City College 31.7 214 Ventura College 31.2 48 San Bernardino Valley College 30.7 114 Bakersfield College 28.8 52 Pasadena City College 28.0 125 Santa Barbara City College 26.9 293 Southwestern College 26.7 528 Fullerton College 25.7 451 West Los Angeles College 25.5 86 Los Angeles Harbor College 20.7 111 California State U Dominguez Hills 20.6 417 California State U Los Angeles 20.5 417 Palomar College 20.4 835 Long Beach Community College 20.1 488