Beauty schools have ugly college loan default record

When barbers and manicurists get trained at federal expense, taxpayers too often end up with nothing but the clippings.

 

By law, the U.S. Department of Education (DoE) must provide or guarantee loans for all qualified students in higher education, from those seeking doctorates in history to certificates in automotive repair. DoE projects about $136 billion in outstanding loans during the upcoming academic year, rising past $200 billion five years hence.

 

An examination of federal data shows that of the six institutions with the highest default rates, four teach beauty culture.

 

Even before the economic downturn, hundreds of thousands of borrowers weren’t paying back their loans, leaving the government with the tab. The problem stems from a system that encourages schools to arrange loans for students — but doesn’t encourage schools to see that students return the money.

 

Because of federal incentives, many schools arrange loans they should anticipate won’t be paid back. Colleges eagerly help low-income students take out considerable debt to pay colleges upfront.

 

It is nearly impossible for DoE to penalize irresponsible colleges. Current law allows it to disqualify institutions only if a fourth of their students default in three consecutive years or 40 percent do so in one year.

 

The department has only tried to sanction two institutions since 2001. Both wiggled out of the penalties through loopholes.

 

Even before the recession, the number and percentage of students defaulting each year had been climbing from 4.5 percent in fiscal year 2003 to an anticipated 6.9 percent in fiscal year 2007, doubling from 115,568 to 231,659.

 

The highest default rates come not at the most expensive colleges but at trade schools, which cost far less to attend and typically require only a year or two of attendance. Cosmetology schools aren’t painting their own faces very prettily as their students defaulted at the highest rates in 2006, the last year of complete statistics.

 

The worst case involves the Charleston School of Beauty Culture in West Virginia, where about 40 percent of borrowers, taking out an average of $4,161, defaulted.

 

The next worst school in terms of defaults that year is the LT International Beauty School in Philadelphia, where nearly a third of the 48 borrowers fell into default. Third place goes to Hairmasters Institute of Cosmetology in Bloomington, Ill., where more than a quarter of the 53 borrowers defaulted.

 

Tuition for the most expensive program at Hairmasters costs $13,550. Compare that to the list price of $175,800 for four years at Bates College in Lewiston, ME. Bates’ default rate consistently falls below one percent.

 

But would-be barbers aren’t the only ones defaulting at hair-raising levels. Some business schools aren’t teaching money management well. About 25 percent of borrowers in repayment at Huntington Junior College, which trains accountants and business managers, defaulted in 2006. The college blames a slow West Virginia economy.

 

The Dallas Institute of Funeral Service fell in danger of having to plan its own burial. DoE flagged it as “at risk” when 24.6 and 29.5 percent of its borrowers entered default in consecutive years.

 

“We had a very poor servicer who was handling our student loans,” said Institute president James Shoemake. He said the servicer “didn’t follow through with all the steps to prevent defaults,” not even calling former students.

 

Overall, about 11 percent of attendees of for-profit institutions that offer professional certificates or associate degrees default, compared to less than five percent of attendees of public schools. And only 2.5 percent of those attending more expensive private schools defaulted.

 

Mark Walsh, who heads DoE’s default management team, said “quite often, when we talk with independent schools, they say we don’t have the resources; we don’t have the money to deal with default prevention.”

 

DoE found that colleges don’t adequately follow up on students; many don’t even keep their phone numbers. Some schools don’t look for signs of trouble before students drop out, such as weak mid-term grades.

 

Schools can do better. Hardly anyone defaults, for instance, from Tulsa Welding School in Oklahoma. The school “sends letters out to students reminding them of repayment,” explained TWS executive director Debbie Burke.

 

 “The key is starting with them before their actual graduation, letting them know how important it is: If you decide not to pay, it could affect your credit rating, your ability to buy a car, a home.”

 

President Barack Obama has proposed significant expansion and reform of student aid. When Congress considers reform, it should require colleges to increase their care in giving and following up of loans.

 

Charles Pekow is a senior writer with Community College Weekly.