Loan Default Rate Falls Amid Crackdown

To the owner of Eldorado Colleges, his students’ loss of federal financial aid was the result of overzealous bureaucrats who unfairly forced the chain of vocational schools to close this week, in the process cutting loose 800 students who were learning skills to land a good job.

But to federal officials, declaring that Eldorado’s students would no longer get federal aid was a necessary final act after years of struggle with the school, where more than 25% of the students default on federally backed loans.

Either way, the five Eldorado campuses, including one in Anaheim, are the latest casualties in the nationwide crackdown to reduce the number of student loans that are not repaid.

Student loan default rates have dropped for the fifth year in a row, to 10.4%, a trend the U.S. Education Department chalks up to its aggressive collections and enforcement efforts. This year, federal authorities seized $500 million in income tax refunds from delinquent student loan borrowers and garnished $19 million from their wages.

Education officials have also been targeting colleges and trade schools where 25% or more of the students default on loans three years in a row.

Since Congress expanded its powers in 1993, the Education Department has revoked the “eligibility to participate” of more than 900 institutions--most of them trade schools that officials contend were essentially set up to harvest profits from federal funds.

“We’ve been weeding out the bad apples,” said Jane Glickman, an Education Department spokeswoman. “We hope the ones that are left are doing a better job informing their students of their [repayment] responsibilities.”

In the book “The Student Aid Game,” economists Morton Owen Schapiro and Michael S. McPherson report that 26.6% of Pell grants, the largest direct student aid program, went to those attending proprietary vocation schools in 1987-88. That percentage shrank to 15.3% in 1993-94, as federal officials clamped down.

“It’s an example of the government getting something right,” said Schapiro, the dean of USC’s College of Letters, Arts and Sciences. “Proprietary schools have done a lot of good, but there is no reason that the taxpayers have to pay all of the costs.”

Trade school representatives acknowledge that the law has cleared out some unscrupulous schools. But they have been lobbying Congress to reconsider the 25% rule, maintaining that it has resulted in the closure of good schools too, thus disrupting the education of low-income students.

Such is the case with Eldorado Colleges, insists owner and President Anthony J. Pitale.

His school, which opened 26 years ago, grew to five locations--besides Anaheim, there are campuses in Escondido, Oceanside, San Diego and West Covina. The school has graduated 10,412 students. Those now enrolled got the bad news when they arrived for class Monday.

Students spent an average of six months in various training programs, attending class six hours a day four days a week. They paid $5,000 to $7,000 to learn to become bookkeepers, legal secretaries, computer technicians, junior accountants or hotel desk clerks.

The school, which generated about $8 million a year in revenue, found jobs for about 75% of its graduates, Pitale said. Many students were coming off welfare, unemployment or disability status, he said, and some did not have high school diplomas. Given their income levels, it’s not surprising that some were unable to repay their loans, he argued.

“It is really unfair,” Pitale said of the federal decision to bar Eldorado from U.S. aid. “If the students don’t pay, why should the school die? We are not involved in qualifying the student for a loan, or collecting on that loan.”

Eldorado appealed the decision to pull its eligibility two years ago, contending that “erroneous data” resulted in the mistaken classification of seven loans totaling $20,000. “Our whole industry has been over-regulated,” Pitale said. “There has been a killer mentality from the Department of Education.”

Glickman of the Education Department said federal officials cannot discuss details of the case, which remains in litigation. But she said Eldorado had “failed to produce evidence that reduced the school’s default rate significantly.”

Eldorado’s default rate was 27.5% in 1993, 36.2% in 1994 and 38.9% in 1995, she said.

The Education Department earlier this month released a new list of schools that have lost federal aid eligibility because more than a quarter of their students had defaulted on student loans.

Besides an assortment of vocational schools, the list included Compton Community College.

Only a tiny fraction of its student body obtained federal loans--95 out of nearly 5,000 students in 1995, for instance. But 32.8% of those borrowers were in default.

“We are appealing this, and we feel that our status will be reinstated,” said college President Ulis Williams.

The community college has made “default management” a top priority, he said. “We counsel the students. We help them with financial planning and we keep in constant communications with them. As you know, Compton Community College is in an area where employers are not running down to give people a job.”

At Eldorado’s campuses, Pitale and some of the 186 teachers and staff spent Tuesday trying to shepherd students into other schools.

“I’m not getting paid today, but I’m here because I care about the students,” said Jann Underwood-Holmes, an accounting teacher. “I’m trying to make sure that the students who didn’t get their diplomas have them mailed out before we lock the doors.”