About 8 percent of California student borrowers who took out federal loans for college and entered repayment in 2009 defaulted on their loans within two years – the highest federal student loan default rate the state has seen in at least six years, according to new data from the U.S. Department of Education.
Nationally, student borrowers fared a bit worse. About 8.8 percent of student borrowers – more than 320,000 people – defaulted within two years, the highest rate since 1997, said James Kvaal, deputy undersecretary for the Department of Education, in a media call this week.
While Kvaal said the government tends to recoup most of the money through collections agencies and lawsuits, defaulting on student loans has negative consequences for borrowers. They lose student loan eligibility, get stains on their credit score and could face wage garnishment. Federal student loans typically cannot be discharged through bankruptcy.
Kvaal attributed the high rates to two main drivers: The poor economy and the growth of for-profit colleges.
"We do see a strong relationship between student loan default rates and unemployment rates," Kvaal said. "We also generally see that credit delinquency rates are a trailing indicator of economic problems."
Meanwhile, for-profit colleges saw disproportionate rates. Defaults grew from 11.6 percent to 15 percent at for-profit schools, from 6 percent to 7.2 percent for public institutions, and from 4 percent to 4.6 percent for private institutions. About 150,000 borrowers who defaulted attended for-profit colleges.
|Cohort Default Rates - California|
|Year||Borrower Default Rate (%)|
|Source: U.S. Department of Education|
In California, campuses owned by Santa Ana-based for-profit giant Corinthian Colleges stand out on the list of colleges with the highest default rates. Nine Everest College campuses and two WyoTech campuses saw at least one-fifth of borrowers default within two years.
Corinthian Colleges spokesman Kent Jenkins attributed the company's high default rates to the economy and problems with the firm's previous strategy for dealing with defaults. Corinthian changed its strategy more than a year ago and is investing $10 million annually in managing defaults. Jenkins said the company expects to cut its default rates to between 9 percent and 10 percent company-wide for borrowers who entered repayment in 2010.
Jenkins said the company's approach to defaults involves contacting its highly mobile students while they are enrolled and staying in touch with them after they graduate to make sure they are aware of their options.
"We have spent a lot of time, energy and resources to address those rates, and we are seeing very, very significant decreases," he said.
Kvaal said the education department has seen some institutions cut their default rates by urging students to enter forbearance or deferment – which allows borrowers to temporarily stop making loan payments if they are unemployed, re-enrolled in school or face economic hardship. The problem is that loans continue to accrue interest while in forbearance.
"(It’s) a good thing if it helps those students manage their student loan responsibilities," Kvaal said. "But in some cases it may serve to just delay the default and increase the amount of the loan."
The college with the highest default rate in California – not including institutions with fewer than 50 borrowers in repayment – is the Institution of Technology in Clovis, owned by BrightStar Education Group, where 28 percent of borrowers defaulted within two years.
Former BrightStar CEO James Haga said earlier this year that the company expected to post record low rates due to a new default management approach. But the rate at the Institute of Technology remained steady at 28 percent, the same as last year's.
BrightStar's vice president of compliance, Rick Wood, said the company had expected more progress than it has seen, but now expects to cut its default rate to below 10 percent next year.
While colleges with higher enrollment of low-income students tend to have higher loan default rates, the figures reveal variations in default rates even among institutions with similar populations and missions.
Everest College's San Francisco campus saw 23 percent of its borrowers default within two years, the highest reported rate of any college in the city. Heald College, another for-profit college in San Francisco, serves a higher percentage of low-income students but posted an 11 percent default rate.
Jenkins said he couldn't explain the variation, and said teasing out the reasons would require a great deal of analysis.
Deborah Frankle Cochrane, program director for the Institute for College Access and Success, said the variation pointed to differences in value.
"When you see colleges of the same type and offering the same programs with dramatically different cohort default rates, you have to assume that there are other factors, primarily institutional quality, that are contributing to that," she said.
Schools with excessive default rates may lose eligibility in one or more federal student aid programs. Schools whose default rates either exceeded 25 percent for three consecutive years or exceeded 40 percent in the latest year face sanctions.
In California, new legislation sanctions colleges with high default rates using a different measure: The percentage of borrowers who default within three years of entering repayment, rather than two years. Colleges with three-year default rates at or above 24.6 percent and with more than 40 percent of their undergraduate enrollment borrowing through federal student loans cannot receive Cal Grants beginning this fall. Fourteen Everest College campuses and two WyoTech campuses are on the list [PDF].