FRANKFORT — Donald and Stacey Lee racked up about $70,000 in federally insured student loans while attending private, for-profit Daymar College's campus in Paducah, where they live.
Donald, 41, enrolled for a two-year degree in criminal justice, although a felony conviction on his record means getting a law enforcement job is next to impossible. Stacey, 38, studied to be a medical office assistant, also a two-year degree.
They quit school last year because of day care problems with their son and defaulted on the loans. That buried them in debt. They haven't filed for bankruptcy, in part because changes to bankruptcy law make it difficult to erase student loans.
Daymar College financial aid officials "signed us up" for the loans and controlled access to the accounts, Donald Lee said last week as he prepared to start another shift washing dishes at a Chinese restaurant.
"It's an awful lot of money for just two years at this little school," he said. "When the loan papers came in, they just handed them to us, told us to sign them and took them back. We never saw them again."
The Lees aren't unusual. At Daymar's Paducah campus, one in three students whose first payments on federal student loans came due in 2008 defaulted during the next three years — meaning they stopped paying or never started — giving the school one of the state's highest default rates, according to data released in April by the U.S. Department of Education.
Overall, of the 81 Kentucky schools eligible for federal student loan programs, 35 showed a three-year default rate for 2008 that was higher than the national average of 13.8 percent, according to federal data. Nationally, student debt and default rates are rising, prompting warnings of a looming financial calamity similar to the home mortgage crisis.
The state's worst default rates are found at private, for-profit "career colleges" and several campuses of the Kentucky Community and Technical College System. For-profit schools, however, tend to cost more than taxpayer-supported community colleges and put students deeper in debt.
For instance, Daymar College charged $34,084 last year for tuition, fees, books and supplies for a student wanting to become a medical office assistant, a popular major. (That's more than the job pays in a year. A Kentuckian in that job gets an average salary of $28,000, according to the U.S. Bureau of Labor Statistics.)
By contrast, the average net price for all students at the community college in Maysville, which has a three-year default rate of 29 percent, was $5,255.
Still, community college officials say they take the problem seriously. Gloria McCall, vice chancellor of student affairs for the system, said community colleges are studying their three-year default rates, which were made available this year for the first time, and discussing the possible causes.
"We have plans to help schools improve," McCall said.
Daymar College, which is being sued in U.S. District Court by more than 140 current and former students who allege they were cheated out of educations they paid for, did not return several calls seeking comment. Donald and Stacey Lee are among the plaintiffs.
Until earlier this year, Daymar College president Mark Gabis was chairman of the State Board of Proprietary Education, which is responsible for regulating for-profit colleges and safeguarding their students. A state audit in April sharply criticized the board, calling it an inattentive watchdog.
"There is little incentive for schools to stay in compliance with regulations and policies if there is no risk of detection or penalty," auditors wrote.
Critics say someone in Kentucky needs to investigate student loan defaults.
High unemployment is driving more people to return to school in hopes of improving their job prospects, said state Rep. Reginald Meeks, D-Louisville, a member of the House Education Committee.
However, many end up saddled with unrecoverable debt, leaving them and taxpayers on the hook, Meeks said. Kentucky college students graduated in 2009 with an average education-related debt of $19,112, according to federal data.
"There is a tremendous desire by Kentuckians to better themselves, which is good," Meeks said. "But for a lot of people who start down this road to a better job, a better life, it leads to a dead end because there's not enough people trying to protect them from entities who might not have their best interests at heart."
Action might be coming this summer.
Kentucky Attorney General Jack Conway is leading an investigation with 17 other attorneys general into possible consumer protection violations by for-profit schools. Lawsuits are likely, Conway said in an interview last week.
He said default rates are one of the four clues for his investigators. The other three are student complaints, inadequate educational accreditation and deceptive marketing tactics. His office is studying the records of seven for-profit schools in Kentucky.
High default rates can be a sign that a school produces unemployable graduates, Conway said.
"If you see a school that promises its students 95 percent job placement but it's got a 25 percent loan default rate, then you've obviously got a problem," Conway said.
"My concern is that a lot of people are hurting right now, and these schools are preying on them," he said. "Nobody discloses upfront that you can end up with all this debt and a degree that you can't do anything with."
Nationally, students at for-profit schools represent 26 percent of federal student loan borrowers and 43 percent of the subsequent defaults, according to federal data.
"A lot of the proprietary schools get 80 to 90 percent of their money from federal student aid, the loans and the Pell Grants. If they lose access to that aid, they basically have to close," said Debbie Cochrane of the Institute for College Access and Success in Oakland, Calif.
Older, poorer students
The for-profit college industry in Kentucky defends its record by arguing that its students tend to be older, without the financial support of parents, and poorer, often having gotten into financial trouble before they enrolled in classes.
Students sometimes drop out rather than complete their coursework, which can't be held against the college, said A.R. Sullivan, chancellor of private, for-profit Sullivan University.
"Students in lower socioeconomic demographic classes in many cases, and this is true of poorer Kentuckians, don't pay their bills for reasons that have nothing to do with the schools that they've attended," Sullivan said.
"When they fail, they blame the school for their own lack of drive and determination. We take that with a grain of salt," he said.
Sullivan also said in an opinion piece published by the Herald-Leader last month that Kentucky's for-profit schools graduate 61 percent of their students, compared to less than 20 percent for community colleges.
The three-year default rate for Sullivan University's Louisville campus is 25 percent, according to federal data. The school received about $18 million in federal student loans during the 2008-09 school year, with nearly two-thirds of its undergraduates getting at least one loan, according to federal data.
For-profit schools are emerging as a political player in Kentucky. Their executives and employees have spent more than $167,000 on political donations since 2002, mostly during the last few years. The Kentucky Association of Career Colleges and Schools, which represents the industry, spent $36,000 lobbying the 2011 General Assembly.
Much of the lobbying went to defeat a bill by Meeks, the Louisville legislator, that would have ended the industry's control of the State Board of Proprietary Education. The House voted 57-38 to approve Meeks' bill, but it died in the Senate.
"They were working behind the scenes against my bill all along," Meeks said. "Nationally and in Kentucky, the industry spent a lot of money this last year not just on lobbying but on advertising, trying to paint a positive picture of itself in order to head off reforms."
The industry blames Meeks for not accepting "constructive amendments" to his bill.
"The version that was ultimately considered by the House was punitive to our schools, and at that point we had no choice but to oppose it," said Candace Bensel, executive director of the Kentucky Association of Career Colleges and Schools.
Looking at the data
Until this year, the Education Department tracked default rates on a two-year basis, or how many students defaulted on federally backed loans within two years of the first payment coming due. This year, on a trial basis, it added three-year default data, which gives a clearer picture of the problem but also immediately made most schools look worse.
The government can drop schools from its student aid programs if their two-year default rates hit 40 percent once or 25 percent for three consecutive years. Three-year default rates won't be held against the schools until 2014.
"The main reason we're providing this data to the schools, since it has no impact yet, is so they can step up their default management. We want them prepared for 2014," said Education Department spokeswoman Jane Glickman.
In interviews, some Kentucky schools complained that the three-year default data might not be as accurate. The government traditionally gives schools a chance to review two-year data for possible errors before it's made public, but that did not happen with the three-year data.
"The statistics cited have not been through a thorough review, and the Department of Education itself warns that they are preliminary numbers not to be used for official purposes," said Bensel of the Kentucky Association of Career Colleges and Schools.
Also, schools with small enrollments said default data might not be statistically significant for them.
For example, the state's highest three-year default rate, at 40 percent, belongs to the private, non-profit Employment Solutions, also known as the College for Technical Education.
Based in Lexington's Gainesway Shopping Center, Employment Solutions says it offers classes in building trades, cosmetology and other vocations to people with "barriers to employment," including disabilities, welfare dependence and criminal records.
However, federal data for the school's class of 2008 shows 15 students entering into repayment and six defaulting. It's not fair to compare that to schools with hundreds of students whose loans are due, said Rick Christman, the school's chief executive.
That said, Christman added, Employment Solutions wants to improve.
"I think we're being more selective now and I think we're screening people better," he said. "I would expect our future cohorts of students to perform better."