Charlie Harper, writing at Peach Pundit, notes the worrisome parallels between the college-loan situation and the housing-loan bubble just before it burst a few years ago:
“Virtually anyone that applied got a loan. There was no consideration given to how the loan would be repaid. No calculations for repayment ability were required. Most borrowers overestimated the value of their purchase and underestimated the income that would be available in the future to retire the debt. The government subsidized an unlimited amount of borrowing, and then the problem was so large that when an alarm was sounded, too many people were invested in the status quo that the system could not be changed until it was too late.”
There’s a lot of truth to that. Outstanding student loan debt hit an estimated $1 trillion this week. And according to the most recent numbers available, more and more students are defaulting on those loans. The annual default rate has risen from 6.7 percent in 2007 to 8.8 percent in 2009, and today, three years later, it’s undoubtedly higher still. In this economy, it can’t be easy coming out of college with a degree and $60,000 or $100,000 in debt.
However, it’s important to point out that college graduates with large debt aren’t really the problem. The larger problem is the predatory for-profit schools that have popped up around the country to try to separate students from their college-loan money and in the process deliver little in the way of useful education.
The industry is large and growing rapidly. During the 2008-2009 academic year, those schools collected $4.3 billion in Pell grants and $20 billion in federal loans. That’s more than double the amount that they received as recently as 2005.
More importantly, the default rates on those loans are very high and rising.
In 2009, just 5.2 percent of students who had attended four-year public schools such as Georgia State or the University of Georgia defaulted on their loans. Just 4.5 percent of those who had attended non-profit private colleges defaulted.
However, the default rate among those attending four-year for-profit proprietary schools was 15.4 percent. Between 2007 and 2009, the number of students from for-profit proprietary schools who defaulted on their loans increased by 65 percent.
(It’s important to note that some for-profit schools do a good job for their students and have a relatively low default rate. If you have questions, the U.S. Department of Education maintains a database that allows you to check the default rate for each institution.)
Why are the default rates among for-profit schools generally so high? As the schools point out, part of it can be explained by the fact they serve non-traditional students. That’s a valid point. But in far too many cases, those students don’t get the education or the degree that they pay for and end up tens of thousands of dollars in debt to the taxpayer without the means to repay it.
The Education Trust, a Washington think tank specializing in higher-ed issues, released a report in November 2010 noting that just 22 percent of full-time students who began a four-year program at for-profit schools actually got a degree within six years. And while some schools do better, some do much much worse.
To many of these schools, the guaranteed federal loan programs are simply a cash cow to be milked. They exist solely because of taxpayers’ money. So in an effort to bring at least some rationality to the industry, the federal government instituted the so-called “90-10″ rule. Colleges are allowed to collect no more than 90 percent of their revenue from federal sources, leaving 10 percent to be generated through actual tuition payments and other private sources.
It’s a good rule. But what did the proprietary schools do in response? In many cases, they created their own, private in-house student loan programs to provide that missing 10 percent. According to a 2011 study by the National Consumer Law Center, the schools finance those loans to their own students knowing full well that many will never be repaid. And they don’t care:
“As documented in this report, the default rates on most institutional loans are shockingly high. The schools seem to view these loans more as “loss leaders” to keep the federal dollars flowing… Schools make unaffordable loans as a way of filling up the 10% category with vapor revenues derived from loans that will never be repaid.”
(The NCLC also points out the great discrepancy in executive pay at for-profit colleges, noting that “the chairman and CEO of the for-profit education company Strayer Education was paid $41.9 million in 2009, 26 times the compensation of the highest-paid president of a traditional university.)
Again, it’s important to stress that these colleges are not surviving in the private marketplace on private money. They are preying on federal dollars funneled through their students. Nonetheless, the issue has become caught up in the ideological warfare in Congress. The Republican-led House has generally taken the position that trying to reduce abuse of federal student-loan programs by proprietary schools amounts to government regulation of private enterprise.
In addition, the proprietary-school industry spent some $6 million in lobbying in 2010 alone. It has also been active on the campaign finance front. According to the Minneapolis Star-Tribune the industry contributed more than $100,000 in 2010 alone to U.S. Rep. John Kline, R-Minn., chairman of the House Education Committee.
Most of the media attention on this issue has focused on the plight of middle-class kids. Politicians, including President Obama, are also playing to that demographic for votes. But in return for their debt, those students are at least getting good educations from good schools. They at least have a fighting chance to turn that education into a career that will allow them to repay that debt.
But millions of others who are largely invisible to the rest of us are being played for suckers, with Uncle Sam as a silent financier in the scam.
– Jay Bookman