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 INDIANAPOLIS, Aug. 27 /PRNewswire/ -- The nation's largest guarantor of student loans today noted cause for optimism in the persisting battle against loan defaults. But USA Funds, Inc., vigorously disputed claims by the Education Department that a government takeover of the student loan program will significantly reduce loan defaults, warning that direct lending is likely to have quite the opposite effect.
 The Indianapolis-based non-profit company guarantees one in five of the nation's student loans. USA Funds and its parent company, USA GROUP, Inc., reacted to Tuesday's Department of Education news conference in which the department named 900 schools, primarily for- profit trade schools, that stand to be excluded from the student loan program because of their excessive default rates.
 The announcement follows passage of a 1989 law that disqualifies schools that post cohort default rates of 30 percent or more for three consecutive years. Earlier, the department announced that the nation's average cohort default rate had dipped to 17.5 percent in fiscal 1991, from 22.4 percent in fiscal 1990, and that default costs had dropped to $2.5 billion in fiscal 1992, down by more than $1 billion, from $3.6 billion in fiscal 1991.
 Reacting to the news, Roy A. Nicholson, chairman of USA GROUP, said: "We are seeing positive evidence that if the full force of the law is behind us in cutting out schools that are in business to collect tuition rather than to educate students, we can save taxpayers billions of dollars in default costs."
 Nicholson applauded the department's action to hold program participants accountable for defaults. He emphasized that responsible guarantors have screened out disreputable schools for years.
 He also warned, "The progress heralded yesterday may be short-lived tomorrow." Nicholson said that direct lending would eventually eliminate banks and guarantors, which have been the primary gatekeepers in screening scam schools from the program. The gatekeepers have strong financial incentives to prevent and pursue defaulted loans.
 USA GROUP has an aggressive default prevention and pursuit program, which will fall by the wayside if the government takes over the student loan program, he said. While the average nationwide default rate of 17.5 percent is still too high, Nicholson noted that as a result of diligent efforts pursuing defaulters, eventually nearly nine out of 10 students repay their loans. Nicholson added, "We seriously doubt the government will have either the incentives or the resources to pursue defaulters as persistently and successfully as guarantors have done."
 Nicholson also noted that the same legislation that authorizes direct lending also creates new loopholes for scam schools. "We fear that relatively few schools that exploit students and rip off taxpayers have tapped a new pipeline to the Federal Treasury. Just when the Department of Education can point to the positive effects of weeding out disreputable schools, the new legislation inexplicably takes a giant step backward."
 Specifically, the new law allows schools that cannot get student loans through conventional lending institutions to get access through "a lender of last resort," with 100 percent insurance provided by the federal government. Just a year ago, Congress passed an amendment that prevented schools with excessive default rates from participating in the lender of last resort program. That exemption was repealed in the new budget reconciliation act.
 "Given what the legislation does to gatekeepers and what it does for high-default-rate schools, it's little wonder that the Career College Association -- the trade association of for-profit schools -- enthusiastically supports this package," Nicholson said.
 He concluded: "Tuesday's announcement about progress on defaults confirms that the current program is working to curb defaults. He added, "A vigorous enforcement policy -- not nationalization -- is the key to solving the default problem."
 -0- 8/27/93
 /CONTACT: Susan O. Conner of USA GROUP, 317-595-1347, or 317-824-4240 (voice mail)/

CO: USA GROUP, Inc.; USA Funds, Inc.; U.S. Department of Education ST: Indiana IN: FIN SU: EXE

KD-DC -- DC017 -- 6648 08/27/93 13:22 EDT
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Publication:PR Newswire
Date:Aug 27, 1993

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