Haven’t we heard this story before? It features a high-pressure sales force persuading consumers in search of the American dream to go deep into debt to purchase an item of frequently dubious value. Default rates are sky higher. Taxpayer money is squandered. Top executives walk away with fortunes.
This sounds like a description of the subprime mortgage industry. But what I just described may be the reality at numerous for-profit colleges.
Their recruitment ads are ubiquitous, offering visions of a cap-and-gown graduation, followed by placement in a well-paying job. At their greatest, for-profit colleges deliver. Many supply top-quality, innovative options for students.
But critics charge that numerous for-profit schools employ overly aggressive recruiting tactics targeting low-income college students. Students take on excessive debt, and though dropout rates aren’t available, there’s reason to believe that they are really higher.
Critics say the business model, especially in the case of publicly traded companies, is premised on a college’s ability to churn via many thousands of students, whose federal Pell grants of up to $5,550 and Stafford loans are paid to the school, with no accountability for student learning or graduation.
For more than 50 years, the federal government has provided students with grants and loans. This has been a powerful investment in our human capital and our nation’s future. Nevertheless, an ongoing investigation through the Senate Committee on Health, Education, Labor and Pensions, or HELP, has raised significant questions about regardless of whether students – and taxpayers – are receiving great worth for the surge of federal dollars flowing to for-profit colleges.
From 2008 to 2009, 23.6 percent of federal Pell grants flowed to for-profit schools, double the percentage from 1999 to 2000. Federal aid to for-profit colleges skyrocketed from less than $5 billion in 2000 to nearly $26.5 billion last year. At many from the main for-profits, federal dollars now account for more than 80 % of their revenue, according to a Department of Education report.
The HELP Committee heard testimony in June from Yasmine Issa, a 29-year-old divorced mother of twins who utilized Pell grants and loans to pay for training to turn out to be an ultrasound technician. After completing the for-profit university plan, she was turned down for jobs simply because the school’s plan was not accredited by the organization that determines if she is eligible for a required exam. She was left with a $21,000 debt.
Issa is not alone; 96 percent of associate-degree students at for-profit schools take out loans, compared with only 38 percent of community college students. And for-profit college students are eight times most likely to graduate with a debt larger than $20,000.
For-profit schools account for only 10 % of students enrolled in greater education, but those college students receive 23 % of federal college student loans and grants and account for 44 % of defaults.
Wall Street money manager Steven Eisman told the committee that numerous for-profit colleges are “marketing machines masquerading as universities” driven by simple access to federal student loans. “The government, the students and the taxpayer bear all of the risk,” Eisman testified.
Eisman, one of the first to predict the collapse of the subprime mortgage industry, sees disturbing similarities in today’s for-profit college industry. He estimates that college students enrolled by for-profit colleges could default on as much as $275 billion in federal student loans in the next decade.
Subprime borrowers were capable to walk away from their homes. But it is really a different story for students, who cannot discharge student debt in bankruptcy; if they can’t pay it off, it will continue to accrue compounded interest indefinitely.
In recent years, an absence of federal oversight has allowed a dangerous bubble to grow in the for-profit college industry. The challenge would be to crack down on the bad actors and abusive practices while preserving the positive options and innovations that numerous for-profit colleges have pioneered.