Kentucky among worst for student loan defaults

For Jeremy Wells, there’s been no escaping mistakes he made decades ago.

Strapped for cash and eager to better his life, the high school dropout took on $5,300 in student loans at a for-profit college, only to discover that his certification for heating and air-conditioner service was worthless.

It delivered no more money to his paycheck and zero help to repay the loans.

 “I’m 20. They said, ‘Sign here. Sign there.’ ” Wells, who's 46, recalled. “I didn’t know any better.”

By the time he walked through the door at a community college in Louisville last year, his dream of becoming an electrical engineer had been in deferment for 21 years. And he figured he’d be shut out because the balance had ballooned to $13,460.

Wells’ story, punctuated with drug addiction, prison and a search for redemption, is by no means typical. But the 46-year-old’s experience  dealing with a student loan in default is all too common in Kentucky and Indiana.

Both states ranked at the top in defaulted student loans during the most recent rankings from the U.S. Department of Education. Despite a stepped-up effort to curb debt loads for college students and a crackdown on for-profit technology and career centers that have been accused of preying on vulnerable students, Kentucky ranked 49th out of the 50 states and the District of Columbia.

Indiana was 47th.

A loan is considered in default if payments lapse for nine months in a row.

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In Kentucky, of 78,112 borrowers who took loans, about 12,150 were listed as in default, a rate of 16 percent. In Indiana, the rate was a bit lower, with 171,454 borrowers and 24,474 in default, or 14 percent, compared with the national average of about 11 percent.

Massachusetts has the lowest rate, at slightly over 6 percent, while New Mexico is the worst at nearly 19 percent.

The education department now annually calculates what’s called cohort default rates, which are the percentage of an institution’s borrowers who start making payments on federal student loans in a fiscal year, and who default within three years of leaving college

In this region, policy makers, economic development advocates and educators are deeply concerned already about the scale of student debt, which now averages around $24,000 per student, and the obstacles that defaulters face in finishing college. When in default, a person loses eligibility for financial aid or income-based repayment plans.

The implications for the homegrown workforce are enormous. Estimates are that more than 60 percent of the jobs in the region will require a post-secondary degree by 2020, but less than a quarter of adults in the two states have a bachelor's degree.

Roughly three-quarters of the well-paying jobs that will support a family are projected in the next decade will require some form of post-secondary education, according to 55,000 Degrees, the Louisville-based organization working to improve college completion rates and the local workforce.

Kentuckians have gotten the message that they need to boost their educational attainment. But the places many less affluent students turn to – for-profit colleges and the state’s lower-priced technical and community college system – have the highest default rates, of between 21 and 30 percent. The rates are 7.7 percent higher than peer institutions in other states, according to research by the Council on Postsecondary Education, which acts as a statewide coordinating agency for Kentucky postsecondary and adult education.

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In the latest rankings for the fiscal year 2013, Jefferson Community and Technical College, where Wells is taking classes now, had a default rate of slightly over 25 percent. Of all campuses in the KCTC system, the Madisonville Community College posted the lowest rate at 21 percent.

“This is very much a reflection of the populations they (the KCTC system) serve,” said David Mahan, executive director of data, research and analysis for the council.

Proportionately, the students going to two-year colleges come from families that are struggling, and it’s “very challenging to keep them on track … (which makes) the default rates that much higher,” Mahan said.

With a median income of $16,000 for students on financial aid at the Jefferson campus in Louisville, the majority are low-income and first-generation college students. They face a steep learning curve in understanding how to navigate college work, much less financing their education, Ben Jackey, a JCTC spokesman, said.

College financial aid officers, under pressure to lower their default rates and curb dropouts that are at increased risk of default, began making a big push in recent years.

Many are assembling default management plans like the one JCTC completed in February. The Louisville-based college has hired the Kentucky Higher Education Assistance Authority to help to profile and identify students at risk of default. Administrators also have set up an alert system to quickly connect with students when their grades fall or when they disappear from classes. Studies show that non-completers are at highest risk for default nationwide.

At JCTC, getting students to the finish line means offering direct counseling, and requiring an elective course, First Year Experience, to teach students about budgeting, compounding interest and smart ways to handle financial aid and loans, said Maria Galyon, an associate professor and the college’s FYE coordinator.

The state of Kentucky also has launched a Work Ready Scholarship program to provide free tuition to help students complete two-year certificate programs in high-demand fields.

To make sure students get their money’s worth, the U.S. Department of Education uses a Gainful Employment Rule, which calculates a student’s annual debt-to-income ratio. Institutions risk losing access to federal Title IV student loans and grant funds if they fail a Gainful Employment metrics test for four years in a row. Programs at three Louisville-area schools had failing grades in a ranking released in January - including Sullivan University’s tourism and travel service, early childhood education and medical office assistant.

Such rankings have forced colleges and technical schools to drop or suspend programs, said Lisa Schrenger, JCTC’s associate director of financial aid.

The most common defaulter is a student who starts in school, spends a few semesters and drops out. “They say, ‘It’s not what I wanted,’ “ said Molly Gesenhues, an adult services counselor with KentuckianaWorks College Access Center.

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Other students get in trouble by registering for four courses - and using their aid and loans to pay for them - then dropping two classes during a semester. Even if they earn A’s in the remaining classes, the rules say that a student’s academic progress is calculated on the original 12 hours. Many end up dropping out after they are disqualified for more aid and loans after two semesters, said Schrenger, so “it’s absolutely a factor in defaults.”

The loans never go away. And warning letters and phone calls about a loan veering into default often don't reach ex-students as they move from place to place, added Gesenhues. “Fifty percent of the people I’ve helped (with a defaulted loan) don’t know they’re in default.”

A dream deferred

Wells was no model student. He did drugs and skipped high school classes. His parents' divorce meant he shifted from his dad's place in North Carolina to his mom's home near Spartanburg, South Carolina. "I didn't have a social life until I got into drugs," Wells said, recalling his teenage shyness. He was staying in Columbus, Ohio with a cousin and installing heating and air units in 1992 when he dialed the toll-free phone number he'd seen in a TV ad for American School of Technology.

Servicing HVAC paid better. The "little scam school" sent a salesman loaded with a high-pressure pitch. Wells fell for it, especially the part about securing higher-paying jobs right out of school.

"That certification didn't mean anything to anybody," he said. "The school shut down last October."

Without extra money, Wells paid for a spell, then put the loans into deferment. Eventually, he fell into default. When he tried to re-enroll in college at 25, "those old loans were haunting me." He'd have to pay cash to get back in the door.

Years passed. He married and started a family and bounced from job to job. Roof sales. Truck driving. More heating and air jobs. Several rounds of rehab didn't lead him to kick drugs, so any thoughts of college slid to a back burner.

Finally, more trouble in his life exposed a silver lining. Sent to federal prison in Illinois for a 2011 conviction for counterfeiting currency in Bowling Green, he started attending church services and drug counseling. At lockup for white-collar criminals, he signed up for free college classes and found he could handle calculus and physics with tutoring from fellow inmates who were electrical engineers.

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The course work reignited hope to get back to school. More inspiration came from his son, Zachary, who graduated in four years from Middle Tennessee State University. He’s working as an animator in Hollywood.

"That motivated me even more," Wells said. When he landed in a Louisville halfway house last June, he visited the access center on JCTC’s main campus at 109 E. Broadway. The center offers free assistance with financial aid forms, career assessments, and for many people looking for a second chance, help to navigate defaulted loans.

He and Gesenhues, the counselor, checked his loan balance on a federal database. Wells' two loans totaled $5,278 when they were disbursed in March 1992, but in the intervening years, the interest and fees added $8,182 to the balance. The two contacted Wells' loan servicer - there are 31 nationwide - to explore how he could get his debt out of default.

“You really have to know what to ask because they won’t volunteer anything,” Wells said of the conversation.

With Gesenhues' help, Wells applied to put the loans into rehabilitation, a process that allowed him to submit financial information and begin making $5 a month payments. After six months without a miss, he qualified again for financial aid, work-study jobs and loans. U.S. Department of Education rules enacted in 2014 allow payments based on a person’s income, not the size of the loan.

While he waited to get back in good graces, Wells paid $1,500 cash he'd made buying cars and trucks over the internet to fund his first 12 hours back in school. He’s now in his second semester, taking a 16-hour load – chemistry, chemistry lab, calculus, English 102 and Interpersonal Communications. He works two mornings a week at JCTC’s library.

Keeping up his 4.0-grade-point average and transferring his associate of science credits to University of Louisville and Speed School of Engineering by fall 2019 is the aim. He hopes the co-op jobs that engineering students line up will help him work his way through. Full payments on the old loans restart when he leaves school. Make that, when he graduates. "I figure I'll have 10 to 15 years to give back," he said.

Sometimes, when he’s spent hours studying and hits a rough patch, Wells said he wonders, “can I even do this?” Mostly, he’s amazed and grateful that, at long last, he’s getting his life in order.

He’s paying his bills on time for the first time ever and working hard in school. “Life’s short, if you’re worried about what you can’t do. I’m going to be an electrical engineer,” Wells said. “I’m going to get there.”

Finally, he’s living the dream.

Reporter Grace Schneider can be reached at 502-582-4082 or gschneider@courier-journal.com.