Higher Education

Will colleges with sky-high default rates face consequences?

New federal data reveals schools where more than half of students default on their loans. Will the government take action?

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The U.S. Department of Education published its annual look at student loan default rates last week, singling out 15 higher education institutions for rates so high that they are at risk of losing their access to federal student aid.

At some of these schools, more than half of students default on their loans. It’s a dismaying figure. But to be honest, after spending much of the last few years reporting on for-profit certificate schools, which make up the bulk of the education agency’s list, we weren’t exactly surprised.

Our story on Premier Education Group – which owns one of the schools cited by the department – revealed how the for-profit chain left many of its graduates thousands of dollars in debt. In partnership with NBC Nightly News, we reported on how these graduates unsuccessfully searched for jobs in their field of study and were often forced to take low-paying positions that made it nearly impossible to pay back their loans.

Meanwhile, ten of the 15 schools on the list were cosmetology or barber schools. Our reporting in collaboration with The New York Times described how some for-profit cosmetology schools in Iowa and elsewhere often leave students tangled up in debt, by charging them steep prices – as much as $20,000 – for programs that lead to jobs that typically pay less than $25,000 annually.

Now some of these institutions may have to pay a price for allowing so many of their students to default.

Related: Tangled up in debt

Schools can lose eligibility for federal financial aid if they have a default rate of 30 percent or higher three years in a row or if their rate hits 40 percent. According to the latest data from the Department of Education, Premier, which operates more than a dozen schools in nine states, had an overall default rate above 30 percent in fiscal year 2016. One of the institutions it owns, Harris School of Business, in Delaware, has reached the 30 percent threshold two years in a row. Harris schools in Pennsylvania and New Jersey posted a 41 percent default rate, placing them on the department’s list of at-risk schools.

That could spell trouble for the embattled company, which has already shuttered at least seven schools since last year. Because the vast majority of its schools enroll mostly low-income students, it relies heavily on federal aid, so losing access to that assistance even at just a few of its campuses could throw Premier into crisis. (Premier did not respond to requests for comment.)

Indeed, most of the schools under scrutiny from the education department will likely be in serious financial jeopardy if sanctions are enforced.

“A lot of schools on the list are small for-profit colleges that exist because of federal financial aid and loans in particular,” said Debbie Cochrane, executive vice president of the nonprofit group the Institute for College Access and Success. “Many of them would not be able to survive if they lost access to loans.”

Related: How some certificate schools profit from vulnerable students

Overall, the Department of Education data showed that the national student loan default rate ticked down slightly from the previous year, to 10.1 percent from 10.8 percent, but that still means that more than 425,000 people defaulted on their loans in fiscal year 2016. These defaults not only hurt taxpayers, since the loans aren’t paid back, but they can also plunge students into financial purgatory. The government can garnish wages or federal benefits, students’ credit ratings can be destroyed and they can be sued by loan servicers.

What makes the news on default rates even worse is that the published rates only include people who’ve defaulted in three years, leaving out perhaps thousands of others who defaulted only after longer periods of time. Those rates also exclude the parents of students who’ve defaulted on Parent PLUS loans.

How many of the 15 schools will ultimately face consequences remains to be seen. The Department of Education allows institutions to appeal the sanctions in a number of ways. Schools that enroll predominantly low-income students can argue, for example, that their job placement or graduation rates show they’re doing an adequate job of serving this population. Colleges with low enrollments can argue that their rate is based on too few students.

That’s a “real challenge when you look at some of these cosmetology schools in particular,” said Colleen Campbell, director for postsecondary education at the Center for American Progress. “Because they’re so small they’re almost always going to skate by on a small cohort argument.”

The Department of Education does not release data about appeals, so it’s hard to know how often schools successfully argue their way out of sanctions. But Campbell said that some schools frequent the list, suggesting they’re never punished.

Last year, Sen. Mitch McConnell (R-KY) made it even easier for some schools to avoid sanctions, by adding a provision to the federal budget allowing the Department of Education to give waivers to schools with high default rates in economically distressed communities. Southeast Kentucky Community and Technical College had three years of default rates above 30 percent and received such a waiver.

Campbell says the education department’s strategy of publishing default rates and tying federal financial aid to schools’ performance has worked in the past to reduce defaults. But she says the system has broken down and that more needs to be done to protect students and borrowers. “With any accountability, you have to continue to refine it so you’re continuing to hold schools accountable,” she said. “We haven’t done that.”

Editor’s note: This story led off this week’s Higher Education newsletter, which is delivered free to subscribers’ inboxes every Thursday with trends and top stories about higher education. Subscribe today!

This story about the student loan default rate was produced by The Hechinger Report, a nonprofit, independent news organization focused on inequality and innovation in education. Sign up for the Hechinger newsletter.

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