U.S. Loan Program May Bar 900 Schools : Education: The colleges and trade institutions face expulsion because so many students have failed to repay borrowed funds.

Nearly 900 colleges and trade schools nationwide, including 120 in California, face expulsion from federal student loan programs because so many of their students have failed to repay the borrowed funds, Education Secretary Richard W. Riley said Tuesday.

Although the national default rate was markedly lower than in previous years--dropping from 22.4% in fiscal 1990 to 17.5% in fiscal 1991--Riley said the rate still remains far too high. He attributed the decline to a crackdown on violators by the Education Department and Congress.

Most of the schools facing exclusion from the loan programs are ones that offer training in such non-academic fields as cosmetology and truck driving. They represent 11% of the estimated 8,000 schools participating in federal student aid programs.

California’s default rate of 19.6% was not the nation’s highest--Alaska had that dubious honor with a rate of 40%, and Vermont’s was the lowest at 5.1%. Nonetheless, California’s rate has national implications because such a large number of schools are involved, said Assistant Education Secretary David Loganecker. “When California or New York has trouble, the rest of the country will feel it.”

Loganecker also singled out California for criticism because of what he called lax state regulations that contributed to the high default rate. He said, however, that the state has made some effort to improve its record.

“California is a state that didn’t have very much oversight of proprietary schools,” Loganecker said. “It was notoriously bad for that. And as a result, we had a high default rate in California.”

The Administration used the release of the figures Tuesday to plug its plan to switch from a government-guaranteed loan system to one in which the government makes the loans directly. It has argued that the change would help reduce defaults and ultimately the cost to taxpayers.

Under the present system, the federal government guarantees the loans, although the money is doled out by private institutions. Schools must verify a student’s eligibility for the loans, and states are expected to ensure that the schools qualify as legitimate educational institutions.

The government pays the interest on the loan while the student is in school. If the student defaults, one of 47 guarantor agencies repays the lender and then tries to collect. If they cannot, the government pays off the loan.

In 1991, the federal government was forced to pay $3.6 billion to lending institutions to cover bad loans. Officials estimate that the defaults will cost taxpayers $2.9 billion in fiscal 1992 and $2.5 billion in fiscal 1993, which begins Oct. 1.

Under a 1989 law, the Education Department may exclude from the federal loan program schools in which 30% or more students have been in default for three consecutive years.

Schools whose names appear on a list released Tuesday will automatically be barred from the loan programs unless they appeal to the Education Department or to the courts. Schools seldom win those appeals, however. Last year, 1,000 schools were barred from the loan programs.

In addition to lax oversight in some states, the Administration has blamed the high rate of defaults on a system in which lenders benefit financially from making as many loans as possible while sharing none of the financial risks because the government insures the loans.

With direct lending, the federal government will be more accountable, the Administration contends.

“We won’t be able to blame a lender; there won’t be lenders in that program,” Loganecker said. “We won’t be able to put the blame on a guarantee agency because there will not be guarantee agencies.”

The Administration has also argued that the new program would reduce defaults by tying repayment to income, so students will be responsible for paying back loans at a rate they can afford.

In fiscal year 1991, 892 schools were at risk of being refused Federal Supplemental Loans for Students because of default rates of 30% or higher for one year, and 304 schools--26 in California--were likely to also lose eligibility for Federal Family Education Loan Programs, formerly called the Guaranteed Student Loan programs, because of default rates of 30% or higher for three years. Many institutions close when they lose eligibility for federal student aid.