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Senators: For-Profits Use Dirty Tricks to Lower Default Rates

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Sen. Tom Harkin, D-Iowa, chairman of the Health, Education, Labor and Pensions Committee, releases a Senate Democratic report asserting that for-profit schools often hit vulnerable students with exorbitant tuition, aggressive recruiting practices, and abysmal student outcomes, on Capitol Hill in Washington, Monday, July 30, 2012.

CREDIT: AP Photo/J. Scott Applewhite

Eight U.S. Senators have sent a letter to Education Secretary Arne Duncan demanding an investigation into for-profit colleges which artificially lower their student loan default rates.

An institution can lose its eligibility for federal financial aid if more than 25 percent of students default on their loans within two years. The Senators wrote that in order to hold on to this aid—a hefty $32 billion from the U.S. government just last year—the for-profit sector artificially lowers its default rates.

The letter cited a report from the Senate Committee on Health, Education, Labor, and Pensions that found for-profit institutions manipulating default rates by "encouraging or even harassing borrowers to delay payments on their loans." By deferring or forbearing their loans for a little while, students don't go on the books as being in default—but they might end up owing thousands of extra dollars in additional interest.

Corinthian Colleges Inc. cut its two-year default rate from 21.5 percent to 6.7 percent in a year using such tactics.

The Senators wrote:

With student loan debt now exceeding $1 trillion and average student loan debt continuing to rise, an ever-growing number of students and families are saddled with unmanageable debt.  An increasing share of borrowers – many of whom did not complete their studies – are unable to repay their loans, suffering significant financial consequences. For-profit schools should not be able to use administrative smoke and mirrors to circumvent regulations that protect students and taxpayers, and the Department should take action to prevent these tactics.

For-profit institutions, the letter notes, have far higher default rates than public or nonprofit colleges and universities—but even those rates might be manipulated by such "administrative smoke and mirrors" as lumping in lower-performing campuses with higher-performing ones.

The letter was signed by Senators Frank Lautenberg (D-NJ), Tom Harkin (D-IA), Dick Durbin (D-Ill), John D. Rockefeller IV (D-W.Va), Richard Blumenthal (D-Conn.), Al Franken (D-Minn.), Jack Reed (D-RI), and Barbara Boxer (D-Calif.). 

Harkin has long led the effort to hold for-profits accountable; he chairs the Health, Environment, Labor, and Pensions committee, and has condemned for-profits for their "overpriced tuition, predatory recruiting practices, sky-high dropout rates, billions of taxpayer dollars spent on aggressive marketing and advertising, and companies gaming regulations to maximize profits."

At the time of this writing, there has been no response from the Association of Private Sector Colleges and Universities, the organization that represents for-profit colleges.

Emily Crockett is a reporter with Campus Progress. Follow her on Twitter @emilycrockett.

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