Students at For-Profit Colleges Are Most Likely to Default on Loans, Report Says

September 21, 2009

Students at for-profit colleges and universities are more likely than students at private and public institutions to default on federal student loans, according to a report issued today by the Government Accountability Office.

The report calls for more oversight of the basic skills test that students without a high-school diploma or GED must pass in order to receive federal aid. It also urged the Department of Education to write clear policies to ensure that students can't use "diploma mills" to get a high-school diploma and thereby gain access to federal grants and loans.

The report says that some proprietary colleges help students obtain high-school diplomas from diploma mills to become eligible for federal aid. In a separate audit of the test of basic mathematics and English skills, which gives students without a high-school diploma or the equivalent access to federal student aid, GAO analysts found that test administrators at a local for-profit college gave out answers and changed students' answer sheets so that they would be eligible for federal funds.

Students at for-profit colleges receive 19 percent of federal student aid, which includes Stafford and Perkins Loans as well as Pell Grants for low-income students. During the 2007-8 academic year, students at more than 2,000 proprietary colleges received more than $16-billion in loans, grants, and campus-based federal aid.

Four years into repayment, 23.3 percent of students at those colleges were defaulting on their federal loans—a higher rate than students at either public colleges, where 9.5 percent were defaulting, or private ones, where 6.5 percent were in default.

The default rates might be linked to the demographic characteristics of students at for-profit institutions, the report says. Such students tend to be older and to have lower family incomes, both factors that correlate with increased default rates.

Students who drop out also are more likely to default, the report says.

The report's authors recommend more Department of Education oversight of the basic skills test, including following up with test publishers, which must submit score analyses but often are not compelled to do so, and analyzing test scores more frequently than every three years. The report also recommends that the department provide reviewers with a comprehensive list of recognized high schools in order to identify irregularities.