For Profit Student Loan Default Rate Hits 25%

About one-quarter of students who took out federal loans to attend for-profit colleges defaulted within three years of starting repayment, according to a new federal analysis.

The 25 percent default rate in the for-profit sector, part of an Education Department report to be published Friday, was up from a 21 percent rate estimated in December 2009.

Loan defaults are on the rise throughout higher education because of economic troubles. The three-year default rate for public colleges is now about 11 percent, up from about 10 percent in the previous report. The rate for private nonprofit colleges is about 8 percent, up from about 7 percent.

Federal officials cautioned that the new data, which measured defaults over three years among a group of borrowers who entered repayment in fiscal 2008, are preliminary and are not being used for enforcement. Still, the figures underscore growing challenges facing the for-profit sector.

The Obama administration is considering new regulations related to student debt and loan repayment – an effort that federal officials say would help ensure students in for-profit colleges find “gainful employment.” Many leaders in the for-profit sector – including executives from the Washington Post Co., which operates the Kaplan line of for-profit schools – oppose the proposal.

But loan default measurements will be relevant even if the industry successfully blocks that proposal. Under federal law, schools must keep loan default rates below a certain level or they lose eligibility to participate in federal financial aid programs. A 2008 law ordered a switch, over several years, to a three-year default metric. For enforcement purposes, the government currently measures defaults over two years, which tends to yield a lower rate.

Harris N. Miller, president of the Association of Private Sector Colleges and Universities, said for-profit schools are “obviously concerned” about default rates and are taking steps to lower them.

Sen. Tom Harkin (D-Iowa), who favors tighter regulation of for-profit schools, said the new default data show that “serious questions have to be raised about the taxpayer investment in these companies.”

This article was originally compiled by Nick Anderson of the Washington Post. Before using private student loan companies to finance your or your child’s education, consider looking at the best 529 plans.