For-profit schools student loan default rates 3 times higher

[fry]

From the WSJ:

 

Students who took out government loans to pay for their education at for-profit colleges had a 21% default rate in the first three years they were required to make payments, about three times the level of four-year public and nonprofit institutions, according to a Wall Street Journal analysis of government data scheduled for release Monday.

 

The disclosure of the new default rates comes as the Department of Education has proposed rules to restrict recruitment practices at all colleges. Major for-profit schools, some of which have multimillion-dollar advertising budgets, have been accused of using aggressive marketing tactics. Critics allege the high defaults occur because schools enroll unqualified students who get little benefit from the education and therefore can't pay back the government.

 

Twenty-two campuses of the Everest College chain, a unit of publicly-traded for-profit Corinthian Colleges Inc., had three-year default rates of 30% or higher. One of its schools, Everest Institute in San Antonio, Tex., had a default rate of more than 40%. The Everest schools offer programs in areas including medical assisting, massage therapy and criminal justice.

 

The Kaplan unit of Washington Post Co. had seven campuses at or above the 30% mark and ITT Technical Institute, owned by the publicly-traded ITT Educational Services Inc., had one campus that exceeded the 30% threshold. Of the 5,600 schools whose data are being released Monday, 316 had default rates of 30% or more, and three-quarters were for-profits, the Journal analysis found.

 

Unlike traditional schools, which are operated by governments or nonprofits, for-profit colleges distribute income to shareholders and range in size from mom-and-pop businesses to large publicly traded firms. Recently, the for-profits have branched out from offering just career-training certificates to granting bachelor's and professional degrees.

 

Starting in 2014, because of concern about rising defaults, schools with rates exceeding 30% for three years -- or 40% for one year -- can lose federal financial aid, which can put schools out of business. For-profit schools rely heavily on federal aid programs.

 

Dan Madzelan, acting assistant secretary for postsecondary education, said the data are unofficial and won't result in sanctions. The information covers borrowers who entered repayment in the 2007 fiscal year and defaulted by the end of fiscal 2009. Mr. Madzelan said schools would have time to get their default rates down, and the government "isn't interested in shutting down schools."

 

For-profit schools said the higher default rates reflect the lower-income students and working adults who attend. They note that community colleges, with a similar clientele, have above-average defaults. By the Journal's calculation, community colleges had a 16% default rate.

 

Officials at the for-profits also said a new government program that lets student repay based on their income should lower defaults.

 

In a draft of a Securities and Exchange Commission filing, Corinthian says its average three-year default rate for the 2007 cohort was just less than 30%, one campus exceeded 40% in that time and five exceeded 30% for all three years for which the government released data.

 

Corinthian says it is in compliance with the two-year rates and that it has instituted new efforts to reduce defaults. It said the default rates "are not necessarily indicative of what its three-year [default rate will] be once its default-management program is expanded to accommodate the new rule."

 

Kaplan made a similar statement, adding that a technical problem hurt its default-management efforts and a new pilot program, including student counseling, had cut two-year defaults 25% in some schools. "We are confident that these changes will significantly improve our default rates," the company said. ITT declined to comment.

 

For-profit schools are favorite targets of short-sellers, or investors who try to profit on bets that stocks will fall, and many have focused on default rates. For-profit schools receive more than $16 billion annually in federal student aid, and taxpayers are on the hook for loan losses.

 

The official government default rate measures those that occur only in the first two years that students are required to make payments. Schools with default rates of 25% or more under that benchmark lose eligibility for federal financial aid. But government officials, including those at the U.S. General Accountability Office, worry that the window is too short because defaults are counted only if students don't pay for 270 days, and students can also receive deferments from lenders.

 

The new data show that the three-year rate is indeed much higher than the two-year rate for all schools, especially in the case of for-profits, which have long had a higher default rate than traditional schools. In the cohort of all students who were required to begin repaying in 2007, 7% defaulted in the first two years of repayment, compared with 12% after three. At for-profits, the rate rose from 11% to 21%.

 

Side note: Default doesn't mean the students won't have to repay the loans, it just means they've missed payments and are in collections. Also the government guaranteed student loans are not dischargeable in bankruptcy. There ain't no free lunch.

 

And...the Aviation School of Maintenance, with eight facilities nationally, had a default rate of about 36%.

[delorean]

And, is a coincidence that all of the above run flashy commercials during daytime and late night TV? How about the high pressure seminars?

 

It totally amazes me the amount of money these schools charge as well. I would love to go to cooking school. $45,000 for the new local one for a "diploma"! And six months of the 18 month program is an internship.......so your're paying $15,000 to work for someone!!!!! WTF? The local community college has an excellent cooking course for super cheap--too bad it doesn't line up with my work schedule.

 

University of Phoenix is an other joke. When I was in grad school there was an article in the WSJ about the number of MBA degrees issued that year (2003). There were several 2-3 yrs grad universities in the 10,000 range, Havard was the second highest at 20,000 MBAs, University of Phoenix issued 65,000 with there ONE YEAR program. And they're owned by an investment group.

[Miloe]

Maybe another point in this, the for profit school prices vs a community or regular university.

Seems that attending a for profit means about 3x the expediture for the same paying jobs.

 

I know I made that mistake right out of high school... move out of state, attend a two year program at a for profit. For the money spent, I could have bought a four year degree back home. Hey, it seemed like a good idea at the time, 20 years later not so much.

[fry]

And they're owned by an investment group.

 

And they may be the place to invest for higher than average future returns. Here's a thought:

 

Education in the U.S. is becoming a government facilitated (i.e., promoted, encouraged, defended and subsidized) jobs program for the next generation. As are health care and clean energy. These industries produce domestic jobs that, for the most part, cannot be outsourced offshore; are clean and energy efficient; and, are relatively high tech and well paying. These industries support not just the principal providers...teachers and doctors...but also admin support, consultants, facilities, equipment and supplies providers. They are the next phase of the third wave of U.S. employment migration...the previous waves being the movement of jobs from agriculture to manufacturing to services (Manufacturing and skilled service jobs are increasingly be offshored to the emerging economies of India and China that can do the work at a third of the labor cost. This trend cannot be stopped because the labor cost differential is just too great).

 

And the government will support and defend these industries as it has past mega-jobs movements...like the Cold War. Yeah, the Cold War was a jobs program. The "red menace", the "space race" and all that rhetoric and government spending was to create a domestic jobs machine producing products that would never (hopefully) be used. Missiles, atomic weapons, submarines, the aero-space industry, silos in Nebraska...all produced high tech, well paying jobs. There were of course some potential unintended consequences...world destruction for one...but generally the government's efforts produced the intended results...low unemployment...for fifty years. OK, maybe a little hyperbole...there were some minor foreign policy justifications too...but the economic benefits certainly made the foreign policy arguments easier to sell.

 

So...as in the past, the government is looking to spark the jobs creation of the next generation and education, health care and clean energy fit the bill ("global warming" is to the energy industry what the "missile gap" was to aero-space). Lots of government money is going to be funneled to these industries over the next few decades so investing alongside Uncle Sugar is probably a good bet.