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Published: Jan 12, 2018 5 min read
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New research on student borrowing has just added more evidence that for-profit colleges load up students with debt that they're then unable to pay back.

Over half (52%) of borrowers who attended a for-profit college in 2003 defaulted on their student loans after 12 years, compared with 26% of borrowers at two-year community colleges, according to a new Brookings Institution report published Thursday.

Yet the discrepancy is actually even worse than that number suggests, finds Judith Scott-Clayton, the report's author. That's because for-profit colleges are more expensive than community colleges, and students at for-profit schools borrow at a much higher rate.

So when looking at a broader group of students—those who borrowed and those who didn’t—Scott-Clayton finds that for-profit college students default at a rate that's four times that of students at community colleges, using the same 12-year time frame.

Concern has grown over the past several years about the rising frequency and level of student borrowing, with the state of student loans often described as a crisis. Yet this new report, based on the latest student borrowing data from the U.S. Department of Education, provides a more nuanced look at which borrowers are actually facing the worst trouble.

It turns out the crisis is largely centered within certain populations of student borrowers, including those who attended for-profit colleges and African-Americans, according to the paper.

The problems are not nearly as dire, on an aggregate level, for borrowers who attended four-year, nonprofit universities, especially those that earn a degree. (That’s not to suggest, of course, that there aren’t long-term financial consequences of the higher debt loads.)

Borrowers are considered in default after missing nine months of payments. The number of defaulted federal loans has jumped to more than 8 million as of last year, even as options for flexible repayment plans have increased.

And once you're in default, there are severe consequences: Penalties and collection fees add up, as does interest, so the size of the debt continues to grow. You can't discharge student debt in bankruptcy, and the feds can garnish your tax return or wages to pay down your debt. Your credit rating also suffers, which means the interest rates you're offered on everything from car loans to credit cards could rise. A New York Times investigation last year found that 19 states even suspend the professional license of residents with loans in default.

The Brookings Report report is based on first-time students who enrolled in 1995-96 and 2003-2004, so the research offers an unusual look at what has happened with the loans up to 20 years after the students have left college. Previous reports on default rates have looked at shorter timelines, mainly five years or 12 years after enrolling.

After looking at the longer-term consequences for the earlier group, Scott-Clayton predicts that the default rate for the more recent cohort will only get worse. The default rate for borrowers at all types of colleges from the 1995 group grew to 25% from about 17% between years 12 and 20. Scott-Clayton estimates that share of borrowers from the later group who experience a default could reach 40% by 2023.

That 20-year forecast is even more striking when you look strictly at for-profit colleges. As many as 70% of the 2003 borrowers who attended a for-profit college could default by 2023, the report finds.

Of course, it's possible the same growth pattern won't repeat for the two groups of students—especially given the abnormal job-market effects of the Great Recession.

Likewise, the turbulent history of for-profit colleges after the students in this study enrolled makes it difficult to project the findings onto more recent students. Enrollment in the sector doubled between 2005 and 2010, to more than 2 million students. And then it fell almost as rapidly by 2015, alongside the collapse of two major for-profit chains.

The report comes, however, as critics of the for-profit industry are alarmed by steps from the Trump administration to loosen regulations targeting the sector. Last summer, the Education Department stopped rules that would have cut funding to low-performing programs and made it easier for students who were misled by their colleges to apply for loan forgiveness. The department is currently in the process of replacing the latter set of rules with standards that make it tougher for students to seek loan relief after being defrauded by colleges.

"What is the justification for rolling back these regulations?" Scott-Clayton asks. "What have we learned that would make us less concerned about the situation?"