The television commercials promising college degrees or professional certificates fast are hard to miss. The smiling TV actors offer assurances of future economic security and success. But might these programs be compared to subprime mortgages disguised in academic regalia?
Schools like University of Phoenix, ITT Technical Institute and a host of others are part of the growing for-profit education sector that may the next industry to crash, burn and drag us all down with it, according to Steven Eisman, the investor famous for predicting the subprime mortgage crisis that set off the recession.
The glaring similarity between the subprime mortgage business and for-profit education is the issuance of loans to people who cannot repay them.
For-profit universities are run like businesses — the main goal being to get as many students, and thus dollars, as possible. But the average attendee doesn’t have easy access to daddy’s credit card or 529 plan, so to speak. They come from some of the most disadvantaged segments of society and rely almost exclusively on federal money. Last year alone, the government issued $22.5 billion, or 25 percent of its postsecondary education loan and grant cache, to students enrolled in for-profit programs. The proportion of loans and grants given is especially surprising considering that the for-profit industry enrolls only 10 percent of all college students.
All of this would be financially dandy if students were capable of repaying their loans. Yet upon graduation or early termination of the program (drop out rates are astronomical), many students can’t pay. Eisman predicts these students will default on approximately $275 billion worth of federal loans. Despite making up only 10 percent of the college population, they account for 44 percent of educational loan defaulters, according to data cited by Eisman.
“Are we going to do this all over again? We just loaded up one generation of Americans with mortgage debt they can’t afford to pay back. Are we going to load up a new generation with student loan debt they can never afford to pay back?” said Eisman in his article “Subprime Goes to College,” a review of for-profit education. “If nothing is done, then we are on the cusp of a new social disaster.”
I think we can all agree saddling students with insatiable amounts of debt isn’t economically healthy either for the student or the government. Eisman never tells readers exactly what this future catastrophe might look like, but I think we can infer at least this much: If the government can’t collect its money, then it may have to limit its financial aid offerings, which will impact the neediest segments of the population. If they can’t find aid, they may have to delay or even forgo their education.
But wait… Isn’t this what is already happening?
A 2009 report published by the National Association for College Admission Counseling indicated a rise in the number of students delaying college education for financial reasons. If we look back, even six years ago, these problems still existed. In 2004, low-and-middle-income students had trouble getting in and staying in four-year colleges due to financial concerns, according to a 2010 report by the Congressional Advisory Committee on Student Financial Assistance.
If anything, the problems brought on by the default and future withdrawal of federal dollars will certainly exacerbate an already present problem for students wanting to pursue higher education in this troubled economy.