The for-profit college dropout rate is increasing as reported by U.S. Senator Tom Harkin (D-IA) and the U.S. Senate Health, Education, Labor, and Pensions (HELP) committee.
In this light, Moody’s Investors Service analysts warned that student loan ABS will be negatively impacted because these college students are significantly more likely to default on their loans.
The typical concentrations of for-profit college loans in student loan securitizations range from 5% to 20%. However, the recent HELP report revealed that 54% of students who enrolled in 30 of the largest for-profit colleges left without a degree or certificate by mid-2010 versus 46% in a Department of Education (DOE) study of a 2003-04 cohort.
This shift in college dropout trends is likely to be detrimental because the DOE data said that students who drop out default on their federal student loans at four times the rate of students who do not.
“Students who drop out with student loan debt have a poor ability to repay their loans because they have higher unemployment and lower earnings than graduates,” Moody’s said.
For example, 16% of college dropouts defaulted, while only 4% defaulted for non-dropouts in the 2003-04 cohort.
Similarly, the growing for-profit college dropout rate is one of the “key drivers” of higher default rates for recent repayment vintages of for-profit college loans as well, which is also negative indicator for the sector.