Irvine Firm Faces Penalties Over Student-Loan Defaults

Five schools operated by Irvine-based National Education Corp., the nation’s largest for-profit training firm, are among hundreds of post-secondary schools nationwide that face punitive actions if their student loan default rates are not improved.

More than a dozen other schools operated by National Education that have lower default rates will be required to develop default-management plans as part of a massive government package of rules and legislative proposals designed to reduce the $1.8 billion in defaulted loans each year. U.S. Education Secretary Lauro Cavazos this week announced tough new steps to weed out schools that “promise to educate but deliver only a debt.”

Cavazos’ proposals come amid a continuing scrutiny of default rates at post-secondary schools. Attention has been focused mostly on loans provided to students enrolled in many cosmetology and office training schools, which have been charged with providing little education, and maintaining minimal screening of applicants.

National Education Corp. operates 53 schools nationwide, and industry analysts said the firm is widely regarded as a provider of quality vocational education. National Education also conducts training for thousands of private businesses. The company had revenue last year of $457.5 million.

Chairman H. David Bright expressed surprise at the Department of Education statistics. He disputed the 63% default rate applied to a National Education school in Atlanta and the 58% rate assigned to a school in Rhode Island. The two schools had the highest default rates in those states.

Bright said he believed that National Education’s highest default rate is below 50%. He said the Atlanta school has a high rate because it draws low-income students from inner city areas where students often have a harder time paying back loans.

The new Department of Education rules, in the making for a year, dictate an increasingly tough series of corrective and punitive actions against schools with default rates above 20%.

Those with rates above 60%, about 200 schools, will face limitation, suspension or termination from the government’s student loan program starting Jan. 1, 1991. National Education’s school in Atlanta is in that range.

Schools with default rates of 40% to 60%, currently numbering about 450, must reduce these rates by 5% a year starting in 1991 or face the same penalties. National Education schools in Providence, R.I.; Houston; Harrisburg, Pa., and Silver Spring, Md., were listed in that category.

Schools with rates of 20% to 40% must develop a default-management plan. National Education has at least 12 schools in that category.

All schools will have to provide counseling for first-time borrowers.

Among vocational schools operating in Orange County, none had default rates higher than 40%, and defaults here generally ranked among the lowest in the state. But four community colleges had some of the highest default rates in the county.

For-profit vocational schools have an average 40% default rate, according to the Department of Education, and are singled out in some of the department’s rules and proposals in an effort to reduce their disproportionate share of delinquent borrowers. For instance, the department seeks to eliminate the practice of paying commissions to recruiters.

Bright, in noting that his firm and most others pay the commissions, said he supports many of the government’s proposals but encourages the government to offer more grants to students, particularly those with low incomes.

Bright said National Education already counsels all of its students who are first-time loan recipients about their obligation to repay the government. He said students are shown a videotape of the program in which they are enrolling to make sure that recruiters have not made inflated promises.

Joe Barankin, director of the Private Post-Secondary Education Division of the California Department of Education, said it is conceivable that a school has a high graduation rate, a high placement rate, yet still has a high rate of default because the school has no control over the student.

Analysts said it would be difficult for schools to significantly reduce default rates without severely cutting enrollment. Enrollment is already at low levels because of high employment, which means most people are not interested in vocational training programs, they said.

TOP DEFAULT RATES AT SCHOOLS 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 massive 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.

Default rates are on loans that became due in 1986. Some of the schools listed may no longer be in operation.

Default School City Rate (%) Students *Orange County Top 10* Tam’s Beauty College Garden Grove 34.6 52 Criss College Anaheim 27.9 219 Saddleback College Mission Viejo 25.7 144 Career Academy of Beauty Seal Beach 25.6 39 Pacific Travel School Santa Ana 18.9 222 Fullerton College Fullerton 17.8 276 Rancho Santiago College Santa Ana 18.2 264 Control Data Institute- Anaheim 18.3 289 Anaheim Coastline Community College Fountain Valley 17.4 46 Pacific Christian College Fullerton 16.9 59 *Southern California Top 10* South Bay College Hawthorne 64.7 961 Sierra College of Business Los Angeles 63.5 1,421 California Institute Long Beach 61.9 260 AB Institute San Diego 61.4 44 Leimart Park Beauty College Los Angeles 61.2 98 Technical Health Careers Los Angeles 57.6 125 Wilfred Academy of Hair Los Angeles 52.8 36 and Beauty Educorp Career College Long Beach 52.6 57 Universal College of Beauty Los Angeles 50.6 77 Webster Career College Los Angeles 48.7 715 *National Education’s Top 10* N.E.C. Bryman Campus Atlanta 63.3 109 National Education Center Providence, R.I. 58.0 88 National Education Center Houston 54.1 362 National Education Center Harrisburg, Penn. 42.6 620 National Education Center Silver Spring, Md. 42.2 109 National Education Center Homewood, Ala. 34.4 180 N.E.C. Bryman Campus Torrance 34.0 150 National Education Center Oak Park, Ill. 33.9 121 National Education Center Kansas City, Mo. 34.1 135 National Education Center San Bernardino 32.6 445

Source: U.S. Department of Education