Cavazos Unveils Plan To Combat Loan Defaults

By Mark Walsh — June 07, 1989 7 min read
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Secretary of Education Lauro F. Cavazos last week proposed to begin a “graduated” attack on the escalating problem of federal student-loan defaults by cracking down on schools where a majority of students fail to repay their loans.

The package, which includes both new and final regulations and a series of legislative proposals, initially requires that institutions with default rates above 60 percent be barred from participating in the program.

Schools with somewhat lower default rates would be subject to a series of sanctions and, in later years, possible termination from the program.

Mr. Cavazos’ plan had been awaited with interest here by lawmakers and others as an indicator of whether the new Secretary would seek to stake out a more moderate position than his predecessor, William J. Bennett, who called for considerably more stringent default-reduction methods.

Mr. Cavazos said he was taking a “graduated” approach to the problem.

“It is not realistic to impose an absolute and immediate cut-off at 20 percent,” he said at a press conference to announce the regulations. “Such an action would mean over 2,500 colleges, universities, and proprietary schools would be impacted immediately. The reality is that the Education Department does not have the resources and personnel to enforce in a timely manner such a cut-off level.”

The new proposals are the latest in a series of efforts to control what has become an increasingly serious budgetary issue for the Congress and deepening embarrassment for the higher-education community.

Defaults will cost taxpayers about $1.8 billion in the current fiscal year--more than a third the total cost of the loan program. In 1981, by contrast, default costs were $235 million, according to Education Department figures.

Educators and members of the Congress last week praised the proposals as offering a fairer approach than Mr. Bennett’s, and they predicted that Mr. Cavazos would have more influence in future debates on the issue as a result.

“I would characterize this proposal as a very constructive one, as opposed to the previous Administration, which simply wanted to throw bombs,” said Representative E. Thomas Coleman of Missouri, the ranking Republican on the House Subcommittee on Postsecondary Education. “I think they are going to be players.”

The ‘Graduated’ Approach

The cornerstone of the new plan is similar to an idea put forward by Mr. Bennett: making postsecondary institutions partially accountable for the number of their students who default on federally guaranteed loans.

But unlike Mr. Bennett, Mr. Cavazos would focus sanctions on the relatively small number of schools with default rates of 40 to 60 percent or higher. Mr. Bennett last September proposed regulations that would have allowed for the removal from the guaranteed-loan program of any school with a default rate higher than 20 percent.

The final regulations provide that:

Schools with default rates above 60 percent will be subject to removal from the Guaranteed Student Loan program beginning in 1991. The removal trigger will decrease by 5 percentage points a year over five years, to 40 percent.

Department officials emphasized that removal would not be automatic but would be determined on a case-by-case basis.

  • Schools with 40 to 60 percent rates must reduce their default rates by 5 percentage points per year or face the same limitation, suspension, or termination proceedings.
  • Schools with default rates above 30 percent must delay giving out loans to first-time borrowers until 30 days after the first day of class. They must also prorate tuition refunds to borrowers who leave before half their course is completed.
  • Schools with 20 percent default rates are required to submit management plans to address the causes of their defaults.
  • The regulations, which were published in the June 2 Federal Register, also require that all schools provide entrance counseling to first-time borrowers, and that all vocational schools to disclose job-placement rates and other consumer information to prospective students.

    Trade Schools Hit

    The department defines the default rate as the percentage of an institution’s current and former students whose loans enter repayment in one fiscal year and who fall substantially behind on scheduled payments before the end of the following fiscal year.

    The department cited figures showing that 188 schools have default rates of over 60 percent. Another 450 institutions are within the 40 to 60 percent range, while 1,082 are in the 30 percent range.

    Many of the institutions with the worst default rates are trade or vocational schools with high percentages of low-income students. Some who oppose removing schools from the loan program contend that such efforts will limit access to postsecondary education for disadvantaged students.

    “To them I say, we do no one--least of all the students themselves--a favor by subsidizing a shoddy education at an inferior school,” Mr. Cavazos said.

    The Secretary also announced two new proposed regulations.

    One would require each private vocational school to arrange for another school to complete its courses if it goes out of business. The other calls for lenders to notify borrowers when their loans have been sold to another lender.

    Legislative Proposals

    The package of measures submitted to the Congress by Mr. Cavazos calls for:

    Tightening the “ability to benefit” provision of the law to require high-school dropouts to pass a test approved by the Education Department, rather than by the school, as is now the case, to become eligible for loans.

    The measure would “significantly reduce an institution’s ability to abuse the underprivileged by enrolling them in programs they cannot complete,” Mr. Cavazos said.

    Mr. Bennett had at one time proposed elimination of the ability-to-benefit provision, instead requiring a high-school diploma or its equivalent to be eligible for aid. But he did not include that in his proposed regulations last September.

    Requiring prorated tuition refunds at schools with loan-default rates over 30 percent.

    Prohibiting schools from using commissioned sales representatives to enroll students.

    “We must weed out unethical schools and other program participants whose sole purpose is to profit at the expense of our students and taxpayers,” Mr. Cavazos said.

    The Education Department pulled Mr. Bennett’s proposed regulations last September in an agreement with House education leaders, who dropped their own default-reduction bill in return.

    The House bill would have required schools and lenders with high default rates to enter into default-management plans for three years. Even if the default rate remained high, however, the bill would not have allowed further action after that time as long as the institution followed the management plan.

    Subsequently, the department sought more advice on the regulations, receiving more than 3,600 responses.

    “The letters from students that I have seen have convinced me that abuses have become so rampant that ‘let the buyer beware’ will no longer suffice as public policy in education,” Mr. Cavazos said.

    Meriting an A

    Key House members expressed satisfaction with the proposed initiatives.

    “Secretary Cavazos has come up with moderate, thoughtful regulations and suggestions for both administrative action and legislation,” Representative Pat Williams, the Montana Democrat who chairs the House subcommittee on postsecondary education, said in an interview.

    “The important thing, of course, is to get the default costs down,” he add4ed. “It does look as though the Secretary’s actions will achieve that.”

    Mr. Williams said Mr. Cavazos merited an A for his proposals, adding that “he needed an A to get balanced out in this reporting period.”

    Mr. Coleman said the proposal “tracks philosophically and substantively with what I proposed three years ago and what we had before us last year.”

    Key senators also appeared to be satisfied with the plan.

    Mr. Cavazos has “taken a solid step forward” with the new regulations by incorporating several provisions of a bill twice passed by the Senate, Senator Claiborne Pell, Democrat of Rhode Island and chairman of the education subcommittee, said in a statement.

    Susan Hattan, minority staff director for the Senate subcommittee, said the department “has done a nice job of doing something tough but fair.”

    Higher-education lobbyists commended the Secretary for listening to their views and for offering a balanced set of initiatives.

    “It’s clearly a far more reasonable approach than originally proposed by Bennett. We expected as much,” said David R. Merkowitz, director of public affairs for American Council on Education, the umbrella organization for higher education. “The Secretary has established a far more cooperative environment.”

    Jane E. Adair, spokesman for the Association of Independent Colleges and Schools, an accrediting organization for about 1,000 private career schools, said she was glad to see the incorporation of the idea of default-management plans for schools with problems.

    “We generally support the revised thrust of the regulations,” she said. But she added that her group may take issue with some of the specific measures of Mr. Cavazos’s plan.

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