Default rate at US for-profit schools up to 15 pct

Mon Sep 12, 2011 1:16pm EDT

* Student loan default rates rise

* For-profit sector has highest default rate

* Education Dept moving to tighten standards

WASHINGTON, Sept 12 (Reuters) - New U.S. Education Department figures show rising default rates on student loans with the sharpest increase among students at for-profit trade schools and colleges.

For students in the for-profit sector, the default rate for those who should have started paying back loans in the 2009 fiscal year rose to 15 percent from 11.6 percent for those whose payments began in 2008.

Overall, student default rates rose to 8.8 percent from 7 percent for students at all types of post-secondary schools, the department said.

High default rates can penalize schools under a government crackdown on poor graduation rates in some programs.

The toughest rule would ban schools from taking students with federal loans if at least 35 percent of graduates and dropouts of programs are not paying back their loans, or meet other criteria.

A trade group of 1,500 for-profit schools, the Association of Private Sector Colleges and Universities, is challenging that rule, among others.

APSCU argued that the default rates announced on Monday were misleading, partially because of steps taken by the schools to address problems in recent months, calling the data "looking in the rear view mirror."

"We believe that the default rates will go down when the economy improves and the unemployment rate drops," the group said in a statement.

The default rate rose from 6 percent to 7.2 percent for public schools and from 4.0 to 4.6 percent for private colleges and trade schools, the department said.

The high default rates at for-profit schools have prompted the Education Department under President Barack Obama to crack down on the sector, arguing that some of the schools fail to educate students while burdening them with heavy debts.

Share prices in the industry have suffered during the Education Department crackdown. The S&P education index .GSPEDUS peaked at 124.69 in 2009. It was down 1.5 percent to 66.35 in Monday afternoon trading.

Some schools have already tightened their enrollment standards in a move to reduce defaults and improve graduation rates.

The latest data is from students that the department calls the the fiscal 2009 cohort, essentially people who graduated or dropped out and whose first loan repayments came due between Oct. 1, 2008, and Sept. 30, 2009. They are only counted as defaulting if they stopped making payments before Sept. 30, 2010.

Despite industry efforts, the department is pressing on with the process of tightening standards -- including requirements that schools disclose graduation rates and job placement rates to new students and banning commissions for recruiters, among other rules.

For-profit education companies include Apollo Group (APOL.O), the largest operator in the sector, Career Education Corp (CECO.O) and the Washington Post Co WPO.N, parent of Kaplan Higher Education. (Reporting by Diane Bartz; Editing by Tim Dobbyn)