When William J. Bennett urged banning schools with high default rates from student loan programs three years ago, his controversial proposal ran into congressional opposition and was ultimately withdrawn by his successor as education secretary, Lauro F. Cavazos.
Cavazos said he opposed such "an automatic cutoff" as a way to curb rising student defaults. Instead, the Education Department, under his direction last year, issued more lenient regulations that centered on requiring high-default schools to implement "default management plans."
But Congress has just overruled Cavazos, adopting a plan to control defaults that differs from Bennett's original idea only in the details. Beginning next July, the department will ban federally guaranteed student loans at colleges and trade schools with default rates over 35 percent, a cutoff level that drops to 30 percent in 1993. Bennett's proposal had been 20 percent.
Congressional aides said pressure to reduce the budget deficit led to the major policy reversal, which came last month in the budget reconciliation bill. They said no alternative could be found to meet the bipartisan goal of saving about $2 billion in the student loan program over five years. The provisions adopted are projected to save $1.7 billion.
"It became clear the only way to get those numbers was to do the cutoff," a House aide said.
The initial impact will fall hardest on for-profit trade schools, which enroll large numbers of low-income students and have the highest default rates in postsecondary education. Because many trade schools are dependent on federal student aid, losing federal loan funds could force some schools to close.
The most recent default rates available, for fiscal 1988, show that, overall, 16 percent of students did not repay their loans. The default rate was 27 percent at for-profit trade schools, about 15 percent at community colleges and 6 percent at four-year colleges. Student defaults cost the government about $2.4 billion in the last fiscal year.
The Education Department estimates that next year, 268 private trade schools will be among the 333 institutions banned from loan programs. The number of trade schools is expected to rise to 399 out of the 516 institutions banned in 1993, according to the department.
Fewer than two dozen four-year colleges are projected to lose their eligibility for student loans. The department expects more two-year colleges to be affected -- 57 next year and 94 in 1993. Like trade schools, two-year community colleges often enroll many low-income, disadvantaged students who are more likely to default.
Congress exempted two categories of schools because they were created to serve disadvantaged populations: about two dozen colleges controlled by Native American tribes and 117 historically black institutions. Their exemption lasts until 1994.
Other schools could escape sanctions if they win an appeal to the education secretary based on "mitigating circumstances," as yet undefined in regulations.
But there is virtually nothing that schools can do to reduce the default rates that will be considered in the first round of sanctions. The new law in 1991 targets schools at which defaults consistently exceeded 35 percent in fiscal 1987, 1988 and 1989. Calculation of the rates lags two years because of mandatory waiting periods before students begin repayment or are declared in default.
The issue still being debated is whether the tougher sanctions will reduce the opportunities for disadvantaged students to attend trade schools or community colleges. Critics raised a similar concern about Bennett's proposal.
Education Undersecretary Ted Sanders said the sanctions would actually help disadvantaged students because they would not have student loan debts after attending poor quality schools that trained them inadequately for jobs. In his view, a high default rate is one indicator of poor academic quality.
"When we get the whole package implemented, students are going to be in institutions that are offering a quality program," Sanders said. "We believe what has happened . . . will help students, not hurt them."
Stephen J. Blair, a former department official who now represents trade schools, disagreed with Sanders on both points. Blair argued that a high default rate merely reflects enrollment of low-income students and that, as a result of the new policy, some trade schools will alter their student mix so that they can remain eligible to receive payment in federally backed loans.
"The budget reconciliation made a major hit on poor people. What we are doing is eliminating poor people," said Blair, president of the National Association of Trade and Technical Schools. He predicted some trade schools will "walk from serving high-risk students" by closing city branches and moving to the suburbs, where they can find students less likely to default.
Charles V. Saunders, senior vice president of the American Council on Education, said the impact on postsecondary opportunities for low-income students could not be predicted. His organization, the main lobby for higher education, has objected to an "arbitrary" cutoff based on default rates ever since Bennett made his proposal in 1987.