Advancing a Free Society

Default Rates and For-Profit Colleges

Sunday, June 20, 2010

Since a college education is expensive, many students would be unable to receive a higher education unless they got help with the financing. Some students are lucky to receive the needed resources from their parents, but many others in the United States and elsewhere have to borrow in order to attend college. The vast majority of loan programs available to students are highly subsidized by governments, either through direct government loans with generous interest rates and other terms, or through government insurance of loans from private banks combined with restrictions on the interest rates banks can charge students.

Even though student loans cannot be discharged through personal bankruptcy, default rates have been high. The average rate of default in 2007 was high, about 7%, but still much below the over 20% rate in 1990. In addition, many borrowers with lower incomes work out terms that involve slow and usually only partial repayments of the amounts borrowed. As Posner indicates, for-profits have a high default rate of close to 25% on their student loans. There is a clear hierarchy in default rates by type of school: For-profits have the highest default rates, followed by public and non-profit junior colleges, then by graduates of four year colleges, and graduates of medical and law schools, and other high earning professionals have the lowest default rates.

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