Education Secretary William J. Bennett yesterday announced that colleges and trade schools with high student loan default rates will be investigated and eventually barred from the federal Guaranteed Student Loan program, a move that could close many institutions, including some in the Washington area.
Institutions most likely to be affected are community colleges, for-profit trade schools and historically black colleges and universities, which often serve low-income minority students and tend to have the highest default rates.
Declaring that the skyrocketing cost of student loan defaults is "intolerable," Bennett said any institution with a default rate of more than 50 percent will be reviewed immediately and, if necessary, investigated for fraud and restricted or expelled from the GSL program. Institutions that do not lower their default rates to 20 percent or below within three years also will be subject to restrictions or elimination from the program.
Of the 7,295 institutions participating in the GSL program nationwide, 2,190 had default rates above 20 percent in 1986 and 533 had default rates above 50 percent, according to Education Department figures.
"It's accountability time for all in the student loan business," Bennett said. "Today's default rates are not merely an embarrassment, they are an injustice to the millions of American taxpayers who generously support our student aid program."
Bennett's action is the first time efforts to lower default costs have focused on institutions. GSLs do not become due until six months after a student leaves school, and administrators have asserted in the past that they have little control over former students. Recently, higher education and trade school organizations have urged their members to work harder to lower default rates.
Bennett argued that institutions can reduce defaults by providing better loan counseling, withholding academic transcripts from loan defaulters and tightening admission practices so students with little hope of completion are not admitted.
The announcement drew negative reactions from members of Congress and education groups, who voiced concern about the potential impact -- loss of GSL funds would bankrupt most institutions -- and the disproportionate effect on schools that serve disadvantaged students.
"Obviously, a lot of schools are going to be forced out of business," said Rep. Augustus F. Hawkins (D-Calif.), chairman of the House Education and Labor Committee, in calling Bennett's action "ill-conceived."
Historically black colleges, he said, "may be very adversely affected because they have a predominance of disadvantaged students . . . . I'm not so sure those proposing the stringent regulations are thinking about how we can help these students complete their education."
Stephen Blair, president of the National Association of Trade and Technical Schools, said the new regulations will encourage trade schools to refuse admission to students they consider at high risk of defaulting. As a result, he said, the changes "will be denying access to low-income minority students in this country. The impact of that is unconscionable."
Bennett said the changes should not hurt disadvantaged students. "Students can take their student aid and study at thousands of responsible institutions," he said.
The total cost of defaulted GSLs has climbed from $531 million in fiscal 1983 to a projected $1.6 billion this year. While the rate of defaults has increased only slightly, the expansion of the GSL program and rising tuition costs have driven up default costs, making them account for nearly half of the GSL expenditures.
The rising cost prompted the Senate to include in a bill now before the House a provision allowing guarantee agencies to exclude schools with high default rates from the program. Hawkins said he is also considering a number of other proposals.
In a letter sent to the presidents of institutions participating in the GSL program, Bennett warned that default rates will be calculated beginning this fiscal year. By December 1990, if annual rates are above 20 percent, the department will initiate procedures that could restrict or end participation in the program.
In the District, Howard University has a default rate of about 32 percent and Mount Vernon College has a rate of about 22 percent, according to department figures. There are nine smaller institutions in the District with default rates over 50 percent.
In Maryland, Bowie State and Morgan State Colleges have default rates around 40 percent; the Community College of Baltimore default rate is about 45 percent and Coppin State College's rate is 34 percent.