With student loan defaults approaching $2 billion, the Education Department is ready to tighten the screws on schools turning out more than their share of delinquent borrowers.
New regulations, due by month's end, target what many consider the crux of the problem: profit-making vocational schools that survive primarily on student financial aid and have a loan default rate three times the 12 percent national average.These private schools train people in everything from cosmetology and truck driving to business and commercial art. Although their students receive only about a quarter of all federally guaranteed loans, such schools account for 40 percent of all defaulted loan dollars.
The regulations, from Education Secretary Lauro Cavazos, will prescribe a series of increasingly tough actions against schools depending on their default rates, with those above 35 or 40 percent in line for the most stringent treatment.
Former Education Secretary William Bennett favored a harsher-sounding plan to start automatic proceedings to limit, suspend or terminate participation by schools with default rates above 20 percent. Some 2,354 institutions, more than half of them profit-making vocational schools, fall into that category.
Education Department officials, citing administrative problems with the Bennett plan, say the graduated Cavazos approach is actually stronger medicine.
"I can assure you that more of the shoddy schools with default problems will feel more pain sooner under what Lauro Cavazos is doing than they would have under the Bennett proposal," said deputy undersecretary Charles Kolb.
Stories of exploitation and abuse by unscrupulous trade school operators have been rampant for years, with students routinely depicted as victims of shady recruiting techniques and shoddy education.
Witnesses at congressional and other legislative hearings have described students incapable of doing the coursework, whether from low IQs, illiteracy or having virtually no knowledge of English. Those that can learn sometimes receive little training in the skills they signed up to study.
Students often drop out of a program with nothing to show for their efforts except a debt of $2,500 or more. Even graduates can find they lack the skills they need to compete in the job market.
Proprietary school associations protest that their members are being unjustly tainted by a few bad apples. At the same time, however, they are moving to tighten accreditation procedures, upgrade admissions standards and promote loan default management plans.
Department officials contend that high default rates are a sign of bad school management. Career school executives counter that such rates reflect instead the poor, urban, academically risky students served by many of their institutions as well as a lack of diligence on the part of outside loan collectors.
"You can have a high default rate and a superb school," said Stephen Blair, president of the National Association of Trade and Technical Schools and a former loan program official at the Education Department.
Another proprietary group, the Association of Independent Colleges and Schools, argues that if just one at-risk student succeeds because of a guaranteed student loan, the long-term saving to society covers the cost of 65 defaults.
Some 4.4 million students borrowed nearly $12 billion in guaranteed loans last year to pursue post-secondary education at colleges, universities and private career schools. Defaults last year totaled $1.6 billion - nearly half the annual federal cost of the program. The default figure is expected to reach $1.8 billion this year and rise even higher after that.
Taxpayers are not the only ones shelling out to cover defaults; lenders are becoming vulnerable as well.
The most expensive foul-up ever occurred earlier this year in California when federal guarantees on loans worth $1.4 billion were voided by a loan servicing company's failure to follow proper collection procedures. Nine major U.S. and foreign banks sued last month in an attempt to make the loan trustee, the Bank of America, take responsibility for their losses, which could reach $650 million.
In addition to requiring certain steps of schools with soaring default rates, officials said the department's combination of new rules, administrative actions and legislative proposals may include:
-Pro-rata refunds to victimized students.
-Disclosure of the track records of vocational schools, including completion and job placement rates, to inform prospective students, promote competition and alert the department to problem schools.
-Mandatory loan counseling for all first-time student borrowers.
-More stringent requirements to determine if students without high school diplomas or their equivalent, who are permitted to borrow money for some programs, can truly benefit from the coursework.
-Some way to curb unethical recruitment practices, including pie-in-the-sky pitches made outside prisoner rehabilitation programs, welfare offices and drug treatment centers.