For-Profit Schools Announce Plan To Lower Default Rate on Loans
Washington--Responding to growing pressure from the Education Department to crack down on student-loan defaulters, five groups representing for-profit trade and technical schools last week unveiled a program to boost repayment rates.
The establishment of the "Private Career School Default Management Initiative," announced at a press conference here, came after a warning by Secretary of Education William J. Bennett to all postsecondary institutions to reduce their default rates to below 20 percent by 1990 or risk losing federal student aid.
Nearly one-third of the approximately 7,300 postsecondary institutions that participate in the federal Guaranteed Student Loan program have default rates of more than 20 percent. A disproportionate number of these programs are for-profit proprietary and technical schools.
Defaults on gsl's are expected to cost the federal government $1.6 billion during fiscal year 1988.
The initiative, backed by the National Association of Trade and Technical Schools, the Association of Independent Colleges and Schools, the National Association of Accredited Cosmetology Schools, the National Association of Health Career Schools, and the National Home Study Council, calls on proprietary schools to play a more aggressive role in preventing future student-loan defaults.
The five groups said the program can particularly help their 4,1004member schools, which disproportionately enroll low-income and minority students, who the groups say are statistically more likely to default on their loans.
A manual, which will be sent to the groups' members, outlines steps schools can take to cut their default rates. The guide, under preparation for a year, stresses the school's responsibility to counsel students properly about their future financial obligation when they apply for aid and to remind them just before and after they graduate that their government loans must be repaid.
"We want to make it absolutely clear when they are coming in what their responsibilities are," said Stephen Blair, president of the national trade-schools group.
The manual also contains materials that will help students estimate their future monthly loan payments and contains sample letters students can send to lender agencies if they need a deferment. The manual states that it is always to a student's advantage to seek a deferral on a loan instead of defaulting, which could permanently ruin the student's credit rating.
Under the plan, banks and other lenders will be given access to school information that could help track down defaulting former students.
The associations also plan to hold "default prevention" workshops in 32 states through next April.
The private sector has also brought pressure to bear on trade and technical schools to crack down on student-loan defaulters.
Last month, for example, Chase Manhattan Bank, one of the country's largest providers of gsl's, announced that it would stop granting loans to students who attend technical or trade programs. The bank, citing the higher default rates, said the loans, which are typically smaller than those made to students who atour-year institutions, were not as profitable.
And other banks, say observers, may follow Chase's lead.
The Congress is also planning to examine the high rate of student-loan defaults.
Senator Claiborne Pell, Democrat of Rhode Island, has scheduled hearings Dec. 11 and 17 on the default issue and specifically on his own proposal, which would allow loan-guarantee agencies to refuse to do business with institutions with default rates above 25 percent.
The Senate education subcommittee, which he chairs, is to hear testi8mony from Mr. Bennett, representatives from a "cross section" of higher-education institutions, and lenders.
Mr. Pell has proposed including the anti-default language in the pending omnibus trade bill. But at a recent conference on the education provisions of the bill, House conferees declined to support the measure without hearings and more thorough discussion.
An aide to Mr. Pell said he would continue to pursue the trade bill option but would also seek to move his proposal as separate legislation.