Banks are using the personal touch to fight high loan default rates among trade school students.

Although they represent only a third of schools in the guaranteed loan system, more than 60% of the students in default attend trade schools, which tend to drag down the economics of student lending.

Financial aid administrators at trade schools say the solution lies in personal contact with students and in loan counseling. Some bankers are heeding this advice, and profiting.

"We talk to a lot of students individually and that seems to really help them understand their obligations," said Sandra Dawson, the student loan coordinator at Huntington Banks of Michigan.

The Huntington Bancshares unit provides loans to more than 500 schools in Michigan; the vast majority of them are trade schools, narrowly focused on skills such as hotel management or computer programming. Ms. Dawson said she advises students to make small payments while they are in school to reduce the principal when they graduate.

Financial advice is crucial for schools such as the American College of Beauty Culture in Kalamazoo, Mich. Nearly all its loans come from Huntington, and 36% of the students who took guaranteed loans defaulted on their payments in 1992.

The bank, working with the school's financial aid staff, is lowering the default rates.

If the beauty school does not get the default rate below the Department of Education's 25% cutoff, it will not be eligible for the guaranteed loan program. The school would likely close and Huntington would lose a customer.

"Loan counseling is the key to keeping this school alive," said Elvira LeRoy, financial aid officer at the school. "We do everything we can to let students know when to start repayment and how much they will have to pay.

"Between us and the bank giving them information, we can keep most students paying," she said.

Default rates have been decreasing since fiscal 1991, when the government paid banks a record $3.6 billion to cover defaulted student loans. But the cost to taxpayers is still great. Last year, the government spent an estimated $2 billion to cover defaults, many of which came from trade schools.

The American College of Beauty and Culture is typical of the 3,760 trade schools in the guaranteed loan program. The school enrolls mostly adult, minority, and low-income students. The college places nearly 70% of its students in jobs. Financial aid officers say students default not because they can't afford the payments, but because they don't understand the loan terms.

The government kicks some of the problem schools out of the guaranteed loan program, but others fall through the cracks and keep operating despite high losses.

Banks like Huntington and Crestar Bank in Richmond, Va., however, see the well-being of these schools as a business opportunity.

Clark McGhee, vice president in charge of student lending at Crestar, said banks are taking an increasing interest in the welfare of these trade schools. The market is becoming more important as the need for trade education increases, he said.

"These schools are extremely important to banks because it is these, and not the four-year colleges, that are producing the workers for the future," said Mr. McGhee.

Careers in hotel management, computers, and court reporting, he said, are in particularly high demand. "These students will have jobs when they get out of school and they'll be able to pay off their loans."

Banks also are beginning to work more closely with financial aid administrators to set up loan counseling programs. Some are sending specialized software programs to trade schools that help students figure how much their monthly payments will be after school.

While trade school financial aid administrators also perform loan counseling, they say small staffs and low budgets often keep them from working with every student. Bank help in this area, they say, is crucial.

Brian Hart, vice president of the Business and Banking Institute, a two- year trade school in Des Moines, said a representative from Boatmen's Bancshares, St. Louis, visited his school quarterly to advise students.

"He came over to give them numbers and answer their questions," Mr. Hart said. "The students will ask a banker questions they wouldn't ask us."

He said students were more likely to ask the bankers about the terms of the loans, such as interest rates and payment options.

Some financial aid workers questioned whether the government, making direct loans that bypass the banks, can provide students with such individual attention.

"The government is huge," said Barbara Foster, the director of financial aid for the Scottsdale Culinary Institute in Scottsdale, Ariz. "They have millions of different things going on."

Despite this concern, Ms. Foster's school will become part of the government program in 1996, with the Department of Education lending directly to students. She and other financial aid officers say direct lending may be less complex than the guaranteed program.

"It definitely causes a problem when the lenders sell loans, because it gets the students confused," Ms. Foster said.

When banks sell loans to other financial companies, she said, students don't know where to send their payments. They are also less likely to pay a bill from an unfamiliar company, she added.

Chris Miller of Fugazzi Business College in Lexington, Ky., said she thinks students will take loans from the government more seriously.

"It will make more of an impact on how they view the program," Ms. Miller said. "When they get checks from the banks, they think the money's theirs to spend on whatever they want. Everybody thinks a bank's job is to lend money."

However, banks may be in a perfect position to beat the government in this market, according to Kawika Daguio, a lobbyist for the American Bankers Association. He said it is community banks, and not a Washington- based bureaucracy, that can best give trade schools individual attention.

"If I live in that community, I am in a much better position to see if those students are being served," Mr. Daguio said. He added that banks are also in a better position than the government to tell if a trade school is teaching students valuable skills.

"It's in everybody's interest that these schools are around and that they produce skilled people," he said. "A person who improves their economic status will make for a much better citizen in the long run, and a good customer."

- Ms. Jensen and Mr. Lumetta write for Medill News Service.

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