Colleges That Fail To Trim Default Rates Will Lose Aid, Bennett Says
Washington--Calling postsecondary institutions partly responsible for a "disgraceful" increase in student-loan defaults, Secretary of Education William J. Bennett last week warned colleges and proprietary schools to reduce their default rates to below 20 percent by 1990 or risk losing all federal student aid.
Noting that defaults on Guaranteed Student Loans are expected to cost the federal government $1.6 billion in fiscal 1988, Mr. Bennett said at a press conference here that institutions that fail to reach the target "deserve" to lose federal funds.
"We trust that the new policy will lead many institutions to lower their default rate to a level where they will be able to remain in the program," Mr. Bennett said.
"But there are some institutions that will not act to meet this standard," he continued. "Those that do not should not remain in a program designed to promote educational opportunity, not educational default."
Without revenues from federal student aid, many institutions would go out of business, Mr. Bennett said, adding, "I think you are going to see a fairly dramatic change in the landscape in higher education."
But he insisted that "this plan will not deprive any student of a postsecondary education."
"Students can take their student aid and study at the thousands of responsible institutions that exist," Mr. Bennett said. "Indeed, they will be better off doing so."
Loan costs currently represent the third-largest expenditure in the Education Department's budget, according to Senator Claiborne Pell, Democrat of Rhode Island and chairman of the Senate Subcommittee on Education, the Arts, and Humanities.
In a speech to bankers last week, Senator Pell warned that continued growth in the default rate threatened the future of the gsl program.
Cost of Defaults
Although the rate itself has risen only moderately in recent years, an increase in the volume of loans has substantially boosted the total dollar amount of defaults.
The Administration has stepped up efforts to collect overdue loans from borrowers, and recent Congressional measures have provided incentives for private lenders participating in the program to reduce defaults, Mr. Bennett said. But colleges and other postsecondary schools "bear a responsibility as well," he argued.
Analyzing data from 7,295 postsecondary institutions, department researchers found that 30 percent--or 2,190--had default rates of more than 20 percent in 1986, and 500 had default rates exceeding 50 percent.
The schools with high default rates most typically are community colleges, historically black colleges, and proprietary institutions, such as trade and technical schools.
Under the policy announced last week, which does not require Congressional approval, the department's inspector general will investigate institutions with default rates of more than 50 percent to seek evidence of waste, fraud, or abuse.
In addition, Mr. Bennett said, the department will calculate each institution's default rate in December 1989 and December 1990. Those ates above 20 percent in 1990, he said, will immediately be subject to limitations on the amount of federal loans they can receive, and to temporary suspension from the loan program or elimination from all federal student-aid programs.
Mr. Bennett has sent a letter outlining the details of the plan to every postsecondary institution participating in the gsl program.
Institutions can take a number of actions to reduce default rates, Mr. Bennett says in the letter.
These include, he writes, "admitting only those students who can benefit from their programs; adopting less punitive refund policies; providing better debt counseling and consumer information to students; sharing information on students and defaulters with lenders and guarantee agencies; and taking steps to improve the outcomes of their programs for students."
Postsecondary Officials React
Robert H. Atwell, president of the American Council on Education, said last week he agreed that "institutions need to have some responsibility" in reducing defaults.
"Their role wasn't clear in the past," he said in an interview. "We ought to make it clear in the future."
In an Oct. 28 letter to all college and university presidents, Mr. Atwell urged them to "move aggressively to implement" new federal measures aimed at reducing defaults.
Other postsecondary officials said that while they shared Mr. Bennett's concerns, they had doubts that his new policy would be effective.
"The Secretary still assumes educational institutions can have a significant effect on reducing the default rate," said William C. Clohan Jr., a lawyer for the Association of Independent Colleges and Schools, which represents some 650 for-profit schools that train students in business and health sciences. "I'm not convinced that's the case."
Institutions with high proportions of low-income students, such as proprietary schools and community colleges, are likely to have high default rates, he said, since socioeconomic background is linked to "the propensity of a borrower to default."
Furthermore, he added, under the department's calculations, institutions receive no credit when the federal government recoups defaulted loans. The department last year collected $516 million in defaulted loans, and is expected to collect an additional $656 million this year.
Mr. Clohan said his association and the National Association of Trade and Technical Schools had issued a pamphlet listing activities institutions can undertake to reduce defaults. The associations plan to conduct 50 training sessions this year to help member schools initiate such activities, he said.