Students at for-profit schools in Pennsylvania defaulted nearly three times more often on federally guaranteed loans than students at traditional colleges and universities, a Tribune-Review analysis shows.
Almost one of every five students in 112 for-profit schools in Pennsylvania defaulted during the three years ended in September. About one in 14 students at 195 traditional schools in the state quit repaying their loans, statistics compiled by the Department of Education revealed.
One of the worst default rates belongs to the Kaplan Career Institute, Downtown. About 38 percent, or 395 students, defaulted on their loans, the second worst rate in the state. The school offers classes in health care, law and business.
Kaplan Inc. spokeswoman Michele Mazur said none of the company's schools, including the one Downtown, has been dropped from the government's loan program.
Nationally, students defaulted on $11.5 billion in loan payments owed directly to the government in the year ended Sept. 30, figures show. That's up from $10.3 billion in fiscal 2008.
"This doesn't surprise me, given the state of the economy," said Jay Sukits, a former loan analyst, now assistant professor of business administration at the University of Pittsburgh's Katz Graduate School of Business. "But $11.5 billion is not a small number. It's pretty huge, and it's taxpayer money."
The Department of Education began tracking default rates — loans that go bad within three years after repayments begin — to gauge which schools should qualify for federally supported student aid. Institutions with too many deadbeat students risk being kicked out of the program.
Low-interest Stafford loans are backed by the federal government. That means taxpayers pick up the tab when students quit repaying the loans, which are originated by the educational institutions. They are funded by either a bank or the government.
"That's the real atom bomb here, that your students with federal aid could no longer be accepted to your institution," said Harris Miller, president of the Career College Association, Washington, which represents 1,400 for-profit schools.
Last year, the government dismissed two for-profit schools whose default rates exceeded 40 percent: Healthy Hair Academy of Dallas and Jay's Technical Institute of Houston.
"For-profits spend a lot of time on marketing, and they want to grow," said Richard Garrett, senior research analyst at Eduventures Inc., a higher-education research and consulting firm in Boston.
One way to do that is to push loans — especially when the economy is in recession and students rely more on federal funding.
"All the research shows you're going to have higher default rates at institutions that admit students from lower-income backgrounds than ones with upper-income backgrounds," Miller said. "The only institutions that admit many students from lower-income backgrounds are community colleges, minority institutions and our schools."
Analyst Garrett said a bad economy does affect default rates.
"Jobs are less plentiful and wages are not rising," Garrett said. "And for-profit schools are more skewed toward at-risk, lower-income students who are more likely to default."
Tuition at many for-profit schools isn't cheap. At the Art Institute of Pittsburgh, for instance, tuition ranges from $17,028 for a diploma earned in one year to $85,140 for a bachelor's degree.
The consequences for a loan default are severe. The federal government can garnish wages, and even bankruptcy will not excuse student loan defaults.
Last year, the Department of Education changed from two-year tracking of default rates to three years to better gauge the likelihood of defaults. That is, more defaults will show up when tracking loans for three years.
Currently, a school with two-year default rates over 25 percent can be booted from the federal loan programs. The new rule would disqualify schools with over 30 percent default rates over three years, for repayments starting in 2009 and defaulting by the end of 2012.
The Kaplan Career Institute, Downtown, had a 21.9 percent default rate for a two-year period, and about 38 percent over three years, figures show.
"The economy is driving higher defaults across industries," said a prepared statement from Kaplan Inc., a unit of The Washington Post. Co. "Our higher-ed students are typically underserved working adults with limited financial means."
Education Management Corp., based Downtown, operates 97, for-profit, post-secondary schools in North America — including the Art Institute of Pittsburgh. They offer diploma and degree programs in fields from visual arts to health sciences, with combined enrollment of some 136,000 students.
The 31 Education Management schools offering U.S.-backed loans posted an average three-year default rate of 14.9 percent, according to Tribune Review research.
Jim Sober, investor relations vice president, said most Education Management schools' default rates are lower than their peers. The reason: half its schools are art institutes, whose students tend to be younger and financially supported by their parents.
"Students who are independent, working adults over 25 also tend to complete their education less, and their default rates tend to be higher," Sober said.
Education Management's schools contract with The General Revenue Corp., a unit of student lender Sallie Mae, to help student borrowers manage their debt.
"We want to make sure students are repaying their loans in a way that's appropriate," said Sober. In the long run, he added, the education department's stricter default rules are "probably a net positive for our industry."
Additional Information:Help available
Contact the Pennsylvania Higher Education Assistance Agency. It can help obtain payment extensions, loan deferments and income-based loan restructuring. Call 800-233-0557 or visit its Web site.
