For-Profit Colleges Make Business Out of Managing Debt

Call it one of the dirty little secrets of the education industry: When students can’t pay their loans, many schools manage (some would say, manipulate) default rates so they look better than they really are.

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Without a doubt, it would appear the practice has been far more prevalent among beleaguered for-profit schools than not-for-profits.

Based on my discussions with industry insiders and multiple analysts who have tracked the industry for years, here’s how it works:

How it Works

To qualify to provide federal student loans and grants, schools need to keep their so-called “cohort” default rates below a certain level.

The cohort default rate measures students who default within one to two years of entering repayment. A loan isn’t considered in default until 270 days after a payment has been missed. For years now, according to the Higher Education Act, school are at risk for losing federal aid if defaults exceed has been 25 percent for over two years; that’s in the process of shifting to 30 percent over three years.

To make sure they don’t exceed those limits, the schools contract with companies that specialize in “default management,” which is encouraged by the Education Department as a way to help students.

To many schools, however, it appears “default management” is really a euphemism for making sure default rates don’t exceed those statutory limits in the first two (and now three) years after a student gets a loan.

“Unlike the counseling process with other forms of credit, there is no evidence that institutions are interested in encouraging students to restructure their loans so that they can make at least some level of principal payments,” says analyst Bradley Safalow of PAA Research, who has tracked for-profit schools for nearly a dozen years.

If a student isn’t paying, they’re likely to get a call from a company like General Revenue Corp., a division of Sallie Mae, or Wright International Student Services, which specialize in “default management solutions.”

(Wright did not respond to our request for an interview.)

Every Student ‘Worked’

According to Wright’s website, the company has been successful in bringing down default rates for schools to an average of around 5 percent from over 20 percent. It charges $5 to track a student for two years; $80 if the student is brought current, forbears or defers.

“Every delinquent student is worked until we are successful or the student defaults,” the company says on its website.

If that isn’t clear enough, on another page of the website the company says, “We will track these accounts until the cohort is over.”

In other words, based on the company’s promotional material, it appears students who have defaulted are tracked only as long as they can hurt a school’s default rate.

Herb Greenberg
Senior Stocks
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Wright claims in a video on its website that it currently services 300 schools with 50,000 student accounts.

But this much is clear, Education Undersecretary James Kvaal told me: “We would be concerned by the use of deferments and forbearances in a manner that leaves borrowers less able to repay their loans, but would delay any default until after the two-year window used to measure school default rates.”

Default Management Calling

According to analysts, typically when a default-management firm calls:

The first objective is to get the student to pay. But the person isn't paying it usually means he or she doesn't have a job or don’t make enough money to pay the loan.

If either is the case,  the next goal is to convince the person to either defer the loan for two years or put the loan into forbearance—two tools offered by the government. The difference between the two is that with forbearance, interest is owed and accrues during the period payments aren’t made. With a deferral, interest on subsidized loans doesn’t accrue.

If the student doesn’t qualify for either, the company may push for a repayment price based on income. (The end result tends to be a higher interest rate than traditional payments.)

If all else fails—and the student is still taking classes—the choice might be to consolidate a defaulted loan into a new loan, which resets the default clock.

Kicking the Can

There are variations on the theme, but the result is the same.

“They’re just kicking the can down the road past that window,” says Mark Kantrowitz, publisher of FinAid.org, which is focused on student loans. “Students are still ultimately defaulting.”

To be sure, defaults have been on the upswing, after bottoming at 4.5 percent in 2003. According to the Education Department, the 2008 national cohort default rate (the most recently measured) rose to 7.0 percent from 6.7 percent. For-profits were the worst, jumping to 11.6 percent from 11 percent.