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Greenberg: For-Profit Default Rates Skyrocket

For-profit schools are back in focus today after the Education Department’s release of 2008 three-year student default rates.

Book Stack
Book Stack

The increase for some school using a three-year measurement is a doubling—even a tripling—from the easier to “mange” (er, manipulate?) two-year rates. The bigger the difference between two and three-year rates, according to the Education Department, the more likely the rates were “aggressively managed.” (For more, see my recent piece, “For-Porfit Colleges Make Business Out of Managing Debt.”)

This is important, because for schools to remain eligible for student loans, they need to keep the rate below 30 percent for three years, with sanctions starting in 2014.

Today the Education Department released a trial of 2008 three-year rates, and the results were as expected: A big increase over two year rates.

On average, the default rates for all schools—for-profit, private and public—jumped to 13.8 percent from 6.7 percent.

For-profits as a group jumped from to 25 percent from 11.6 percent.

Notably, schools most at risk would appear to be Corinthian Colleges , Washington Post’s Kaplan Unit, Lincoln Education and ITT Education —all have rates higher than 30 percent. (As I’ve previously reported, Kaplan has taken significant action geared at reducing default rates, by letting students trial classes.)

“We anticipate each of these companies will have to consider increased investments in default management services as well as material changes to their recruiting policies in order to attract higher quality students,” say Brad Safalow of PAA Research. “This will likely exacerbate the decline in enrollments each of these companies is likely to witness over the next two to three years.”

Winners with default rates below 20 percent, according to Height Analytics, include Education Management , Strayer Education , DeVry and Capella . DeVry and Education Management each have one school that is above 30 percent, which would appear to be manageable.

Still in the wings: The expected signing at some point in coming months of new Gainful Employment rules by the Education Department, which have their own eligibility requirements based on repayment rates and student debt-to-income ratios. These metrics are designed to mitigate the impact of manipulated default rates.

The big question, though: How watered down will the final rule be?

Stay tuned.

Questions? Comments? Write to HerbOnTheStreet@cnbc.com

Follow Herb on Twitter: @herbgreenberg

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