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Student loan defaults  put colleges at risk

Starting in 2014, government will use new criteria for colleges to be eligible for aid.

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By Christopher Magan and Lindsey Hilty
Staff Writers Updated 2:22 AM Sunday, June 19, 2011

For Tim Balzer, graduate school has become a place of financial refuge. The 2002 Little Miami High School alum is accruing $37 in interest weekly on his more than $60,000 in student loans that so far have bought him two undergraduate majors, a minor and a master’s degree, all in theater and mathematics.

None has led to a job offer.

“A lot of us with student loans kind of refer to graduate school as a place where we hide from our student loans,” he said.

While in graduate school, loan payments are deferred, even if additional interest is accrued.

Balzer works part time at Costco while he tries to make payments on his loans, and though he continues to search for a full-time job, he may go back to graduate school again for a more marketable degree — something he wishes he would have considered before he went to a private school and studied subjects that did not lead to a direct career path.

While Balzer intends to pay back what he has borrowed in full, there is a growing number of students who are defaulting on loans, leaving taxpayers on the hook and some local schools at risk of losing federal funding.

In 2014, the U.S. Department of Education will use three-year default rates when considering eligibility for federal aid.

Schools with a default rate higher than 30 percent for three years would risk getting ousted from the student aid program, essentially a death notice for a school.

The new rules come as enrollment booms — particularly in the for-profit industry — and a growing number of students qualify for taxpayer-backed student loans. Last year, college loans surpassed outstanding credit card debt, and are approaching $1 trillion.

The default rate for 2009 was 8.9 percent, nearly two points higher than the year before, according to draft data released by U.S. Department of Education.

For-profit colleges account for nearly half of all defaults while representing 27 percent of borrowers and just 12 percent of total college enrollment, federal data shows. The number of for-profit students not repaying loans jumped 49 percent between 2008 and 2009, to 155,211 students in default.

Across all sectors of higher education, 15.2 percent of for-profit students were in default compared to 7.3 percent of public college students and 4.7 percent of students in private schools, the federal data shows. In all, 327,669 students defaulted in 2009, up from 238,852 in 2008.

Students get financial aid in a variety of ways depending on their eligibility. Federal Pell Grants, loans and other assistance first go to pay tuition and fees, but students often can borrow additional money to cover the costs of books, housing and living expenses.

For-profit officials say they are required to offer loans to students who qualify under federal rules.

Critics of the schools say the increasing number of students not repaying loans is evidence that some for-profits prey on low-income people, saddling them with debt for degrees that don’t lead to careers.

“It adds to the impression that the education is not worth the price students are paying for it,” said Kevin Kinser, a professor who studies for-profit colleges at the State University of New York-Albany. High defaults “may speak to quality,” he said.

A Cox Media Group examination found that three area schools — Central State University, Kaplan College and Lincoln College of Technology — would have default rates higher than 30 percent if the tougher standards were in place today, according to data gathered from the U.S. Department of Education.

Do demographics matter?

While schools like Lincoln College of Technology Franklin, formerly Southwestern College, offer assistance in interviewing and resume skills as well as college loan counseling, Executive Director Ron Mills said the economy and student demographics play a large role in default rates.

“Honestly, our biggest challenges are the people who don’t want to get a job,” he said. “We are a career college, and we’re held responsible and accountable for our placements.”

The school has a 65.3 percent placement, which he said is “pretty good given the economy.”

One challenge, Mills said, is that the government holds the schools accountable for loan defaults, but won’t limit the loans a student may take.

“We have a more high-risk student, and they are going to default at a higher rate,” he said. “We try to get students to minimize their loans, but if they know they have money available, they always want to maximize their loans.”

Institutions whose mission is to serve low-income and high-risk college students say losing eligibility for federal aid would close the doors of college for many, they say.

“It would be devastating,” said Phyllis Jeffers-Coly, dean of enrollment management at Central State. The Greene County school, a historically black university where more than 80 percent of the students qualify for federal Pell grants, is increasing student counseling and plans to hire an outside firm to help it come into compliance with the tightening federal rules.

“I understand the (U.S) Department (of Education) is attempting to raise the bar of accountability for all of us,” she said. “However, you have to look at the fact that middle class kids have an easier time navigating the college process than first-time students.”

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