U.S. Moving to Curb Student Loan Defaults

Education Secretary Lauro F. Cavazos on Thursday announced new steps to weed out schools that “promise to educate but deliver only a debt” and to reduce the $1.8-billion student loan default burden on taxpayers.

“There is no shelter for the unscrupulous and no comfort offered to the irresponsible” in the Education Department’s long-awaited package of rules, legislative proposals and administrative steps, Cavazos said.

To Weed Out Schools

“We are taking decisive action against those who cheat our citizens, those who promise to educate but deliver only a debt,” he said. “We must weed out unethical schools and other program participants whose sole purpose is to profit at the expense of our students and the taxpayers.”

The secretary said that the overall default-reduction strategy, including proposals that Congress would need to enact, would save $5.4 billion over 10 years.

The new department rules, in the making for a year, dictate an increasingly tough series of corrective and punitive actions against schools with default rates ranging from 20% to 80% and higher.

Those above 60%, about 200 schools, will face limitation, suspension or termination from the government’s student loan program, starting Jan. 1, 1991. Schools at 40% to 60%, currently numbering about 450, must reduce their default rates by 5% a year starting in 1991 or face the same penalties.

All schools will have to provide counseling for first-time borrowers, and those with default rates above 20% must develop a default management plan.

About 4.6 million students are expected to borrow money under the student loan program in fiscal 1989. The program is projected to cost $5 billion this year, with 37% of the money going to cover defaulted loans.

For-profit vocational schools, which have an average 40% default rate, are singled out in some of the department’s rules and proposals in an effort to reduce their share of delinquent borrowers.

To Tell Placement Data

For example, all vocational schools, regardless of default rate, will have to provide information to prospective students about their course completion and job placement rates. And the department is proposing a further requirement that all of them arrange for another school to complete their courses if they close in mid-semester.