The closure of Butler Business School late last year left a bitter taste in the mouths of Connecticut students and education regulators who weren’t given notice that the Bridgeport for-profit career institute was about to abruptly shut its doors.
The school, which traces its Connecticut roots back to the early 1900s, violated state law when it failed to notify the state Office of Higher Education at least 60 days in advance before going out of business.
But the school left behind another dubious legacy: Its students have one of the highest federal loan default rates in Connecticut, records show.
Of the 173 Butler students who entered their federal loan repayment period between October 2008 and September 2009, nearly 23 percent were unable to make good on their debts to Uncle Sam, federal records show.
Butler, however, is not unique.
Students who attend for-profit vocational schools in Connecticut default on their federal student loans at more than three times the rate of students who attend public or private institutions of higher education in Connecticut, a Hartford Business Journal computer analysis of federal education data has found.
The percentage of vocational student borrowers who defaulted on their federal education loans within the first three years of repayment stood at an average of 19.2 percent in 2011, according to HBJ’s analysis of the most recent data available from the U.S. Department of Education.
Of the 11,164 vocational students who began paying off their federal student loans between October 2008 and September 2009, 2,142 defaulted on their debt over the next three years.
Conversely, only 6.3 percent of students attending the state’s public schools — mainly four-year universities and community colleges — and 5.4 percent of students at private institutions defaulted on their federal loans during that same three-year time period.
The discrepancy mirrors a national trend that has cast a glaring spotlight on for-profit schools and their dependency on students who pay tuition using federal loans, and end up defaulting on their debt.
The issue is also raising alarms among higher education officials in Connecticut.
Students who default on federal loans can’t easily shake off the debt, even if they file for bankruptcy, a situation that harms their future financial prospects and leaves taxpayers and the government, which guarantees the loans, left with the costs.
“It’s clear this is something we have to monitor,” said Braden Hosch, the director of policy and research at the Connecticut Board of Regents for Higher Education. “This paints a picture that shows students who are in public and nonprofit schools tend to be more responsible borrowers and less of a burden to taxpayers.”
Hosch said there are many factors that play into higher default rates among vocational school students, including the sour economy, which has made it difficult for all graduates in recent years to find a job immediately after leaving school.
But socioeconomic factors likely play a larger role, Hosch said. A 2010 report by the Government Accountability Office concluded that students from low-income households who lack higher education are more likely to default. A higher percentage of low-income students attend vocational schools.
Those students lack a safety net if they can’t find a job and enter their loan repayment period, which typically starts six months after graduation.
Borrowers who drop out of school also have higher default rates, Hosch said.
The U.S. Department of Education releases default rates once a year to help the public better understand how students at individual schools fare in paying back federal loans, the majority of the $1 trillion student loan market.
Last year for the first time, the Department of Education provided a three-year default rate. It tracks borrowers who entered loan repayment between October 2008 and September 2009 and defaulted on their debt by the end of September 2011. Traditionally, only a two-year rate has been published.
The change is significant because the likelihood of default is greater in the first three years of repayment. The HBJ analysis focused on the three-year default rates, which include subsidized and unsubsidized Federal Stafford loans. Those are the most common federal student loans.
Nationally, the three-year default rate is 13.4 percent, while the two-year default rate is 9.1 percent. Connecticut’s loan default rates are below the national average. The state’s three-year default rate is 9.8 percent, while the two-year rate is 7 percent.
Thirty-five Connecticut schools, however, had double-digit three-year default rates and two out of three were vocational or trade schools, which raise the most concerns.
Students attending cosmetology schools appear to be having the most trouble repaying their loans, HBJ’s analysis found.
The Branford Academy of Hair & Cosmetology had the highest three-year default rate in Connecticut at the end of 2011 of 31.5 percent, with six of their 19 student borrowers falling behind on loan payments.
Three schools formerly operated by Brio Academy, which were recently taken over by California-based Marinello Schools of Beauty, had default rates of more than 25 percent.
Of the 118 federal student loan borrowers at Brio’s East Hartford location who entered repayment between October 2008 and September 2009, 29 percent of them fell behind on their student loan payments within the next three years. Meanwhile, 27 percent of the 267 student loan borrowers at their school in Meriden defaulted on their loans.
An official from the Marinello Schools of Beauty declined to comment for this story.
The Porter and Chester Institute and Lincoln Technical Institute also had multiple schools where a double digit percentage of their student borrowers defaulted on their federal loans. Both institutions didn’t return calls for comment.
Vocational schools say they have a responsibility to offer education and training to students who aren’t being served by traditional universities and community colleges and who come from more risky socioeconomic backgrounds. They also argue the economy is heavily impacting the higher-than-average loan default rates.
“In the current job market, students are simply finding it harder to repay,” said Tom Netting, a lobbyist for the American Association of Cosmetology Schools, which represents about a half-dozen schools in Connecticut.
Netting said besides the economy and socioeconomic factors, some vocational school students come with pre-existing debt, which compounds their difficulties to repay loans if they get into a bind.
He noted, however, that no cosmetology school in Connecticut is danger of losing its eligibility for federal aid based upon prior students’ repayment history.
Under federal rules, schools with three-year default rates above 25 percent for three consecutive years can lose eligibility to offer financial aid. A school can also lose financial aid eligibility if they have a three-year default rate above 40 percent in a single year.
No Connecticut school reached either of those thresholds, records show.
As for-profit schools have come under closer scrutiny in recent years, a controversial question is whether default rates say anything about education quality.
Hosch, of the Board of Regents, said he doesn’t think that linkage is very strong. Others like Deanne Loonin, an attorney at the National Consumer Law Center in Boston, do.
Loonin said even if students attending vocational schools come from low-income backgrounds, their financial prospects should improve if they receive quality education and meaningful credentials. The higher default rates at certain trade schools raises significant questions over whether that is always the case, she said.
“Schools should be held accountable for high drop-out rates, which are connected to high default rates, and for the employment outcomes of graduates,” Loonin said.
Mark French, the associate director of student financial aid at the state Office of Higher Education, which oversees Connecticut’s vocational schools, said he believes default rates do say something about the employment capabilities students’ gain from a school.
“Students who graduate from upper-tier universities have higher employment rates than students who graduate from vocational schools,” French said.
Students need to be more aware of what jobs are in demand so they get training and education that has a better shot at paying off down the road, French said, adding that schools also need communicate better with students about where they are more likely to find employment.
There have been efforts in recent years to hold career-oriented schools participating in federal student loan programs more accountable for the employment and loan repayment prospects of their students.
The Department of Education adopted controversial “gainful employment” rules in 2011, which aimed to prevent trade schools from leaving students with huge debt and lackluster credentials. But those regulations were struck down last year by a federal judge.
Netting, the cosmetology school association lobbyist, said his organization is not opposed to limiting borrowing limits for students, particularly when individuals take out federal student loans and use the money for non-educational purposes like rent payments.
It’s in a school’s interest to keep default rates low, Netting added, because they could lose access to the federal student loan program.
Efforts to implement tighter loan limits, however, have been rebuffed by student advocates, Netting said.
“Student advocates say they have the right and independence to borrow up to the maximum levels established by law,” Netting said. “We would like to see loan amounts limited to what is truly necessary to pay for their education.”
Hosch said the Board of Regents is looking into how students are using financial aid to pay for college and/or career training.
Whether it leads to new state regulations is yet to be seen. “It is definitely on the agenda,” Hosch said.
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