For-profit colleges make costly loans, report says

For-profit colleges are making “predatory” loans to students, knowing that more than half the debt won’t be repaid, a consumer group says.

Companies including ITT Educational Services Inc., DeVry Inc and Career Education Corp. are making loans that have fixed interest rates as high as 12 percent, according to a report released Monday by the Boston-based National Consumer Law Center. Many of the loans come with “high costs” and “predatory terms,” the group said.

The research follows calls in Congress and at the U.S. Education Department to boost regulation of government aid flowing to for-profit colleges, whose federal-loan default rates are three times those of private, not-for-profit institutions. Under U.S. rules, for-profit colleges must fund at least 10 percent of their operations from sources other than government financial aid programs. Companies are making these “institutional loans” to remain eligible for U.S. funds, the report said.

“Institutional loan programs are aimed at attracting investors and keeping the federal aid pipeline flowing,” Deanne Loonin, the report’s author and a center lawyer, said in a statement. “Each failed loan represents an individual who cannot repay a debt and who may be facing aggressive collection tactics and damaged credit ratings.”

Carmel-based ITT Educational charges origination fees up to 10 percent, with variable interest rates as high as the prime rate plus 11.5 percent and capped at 25 percent, according to the report.

For-profit colleges offer institutional loans when private financial companies aren’t willing to lend to their students, Harris Miller, president of the Association of Private Sector Colleges and Universities, a Washington-based industry group, said.

“When students can’t get enough to pay for their education through a combination of federal grants and loans, and appear to be good candidates for an education, the schools are willing to loan them money, even though there’s a risk,” Miller said.

The report said institutional loan programs “had high interest rates and origination fees, particularly for less creditworthy borrowers.” In some cases, for-profit colleges use third parties to make the loans and then guarantee the debt, the report said.

A loan program at Downers Grove, Ill.-based DeVry charges 12 percent interest, with no origination fees, the report said. Hoffman Estates, Ill.- based Career Education charges 8 percent interest on institutional loans for most students, the report said.

ITT Educational uses a third party for its private student loans, and rates and fees are based on market conditions, the borrower’s creditworthiness and other considerations, said Lauren Littlefield, a company spokeswoman.

DeVry’s loan program “is a valuable service for our students,” Joan Bates, a spokeswoman, said in an e-mail. “It is similar to installment plans offered by traditional colleges and universities.”

As of June 30, the end of DeVry’s fiscal year, less than a third of students carried a balance from the program into the next year, with an average of less than $1,000, Bates said.

Mark Spencer, a spokesman for Career Education, didn’t return a telephone call

DeVry shares rose $1.54, or 3 percent, to $53.65 each in Tuesday trading. ITT gained 58 cents, or less than 1 percent, to $66.42, while Career Education climbed 71 cents, or 3.2 percent, to $23.15

The Bloomberg U.S. For-Profit Education Index of 13 publicly traded companies has fallen 21 percent over the past 12 months.