On Wednesday the Department of Education issued a press release on the rate of student loan defaults over the past three years. This report looked at the total number of current and former students who did not make a payment for 360 consecutive days. While the overall number of defaults has declined, this report showed that for-profit colleges account for 35% of all federal student loans defaults even though they only represent 26% of all federal loans.
The Department of Education has been coming down hard on for-profit colleges such as ITT Technical Institute. In August, the institution was banned from enrolling any new students receiving funding from federal aid. This decision has caused the school to close its doors since 68% of ITT’s revenue came from federal student loans. ITT’s closing affects nearly 8,000 employees and hundreds of thousands of current and former students.
Although the institution has been under investigation for years for accusations of fraud and misleading marketing tactics, the Department of Education’s decision came after ITT’s accreditor, the Accrediting Council for Independent Colleges and Schools, determined the school was not in compliance with ACICS accreditation.
“Our responsibility is first and foremost to protect students and taxpayers,” said U.S. Secretary of Education John B. King Jr. “Looking at all of the risk factors, it’s clear we need to increase financial protection and it wouldn’t be responsible or in the best interest of students to allow ITT to continue enrolling new students who rely on federal student aid funds.”
ITT Technical Institute has 130 campuses in 38 states, so this decision leaves hundreds of thousands of students in limbo. Due to ITT’s lack of regional accreditation, many schools will not accept their credit transfers. And students who received federal aid to attend ITT may not be eligible to have their loans discharged unless they change programs. Additionally, many private lenders and banks won’t even lend to students attending these schools.
In a report for the Brookings Institute, Adam Looney of the Treasury Department and Constantine Yannelis of Stanford University looked at the higher rate of defaults among for-profit colleges and found that those students tended to have poor job prospects and find low paying jobs after graduation, making it harder for them to repay their loans.
Looney and Yannelis wrote, “The so-called student loan crisis in the U.S. is largely concentrated among non-traditional borrowers attending for-profit schools and other non-selective institutions, who have relatively weak educational outcomes and difficulty finding jobs after starting to repay their loans. In contrast, most borrowers at four-year public and private non-profit institutions have relatively low rates of default, solid earnings, and steady employment rates.”
While many politicians will try to make the point that high student loan debt leads to a higher rate of default, data from the Consumer Credit Panel shows that the default rate actually drops as the amount of borrowing increases. 34% of federal student loan defaults occur on loans less than $5,000 while only 18% of students with more than $100,000 of student debt defaulted on their loans.