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College loan bubble next to pop?

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.

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  • Mike

    What will happen is simple.
    It will be a money vaccuum.
    Defautled students like me (school 2003-2007 2 for profit schools, dropped out of second, useless INCORRECT degree from the first that the college disowns me)
    I am being garnished for the federal loan of 35k through Sallie Mae’s collector Pioneer Credit. I am defaulted on the federal one because the private one of $85k+ Sallie Mae has saddled me with through those schools is owned by them also.
    I now am forced to pay for gas or pay for food and still can’t even dream of paying the $85k.
    I will never have credit, nor be able to buy a home.
    I am one of many from the same schools…same states…that this is happening to.
    I cannot afford to ever have a family or a house. Same for many in my case, how is the future suppose to prosper with an entire generation like this?
    They need to restore the bankruptcy protections so we can restart our lives.
    Gamblers can with normal loans they waste at the casino. Why can’t we that gambled on our future and lost?

  • FA Alarmed

    When the intangible concepts of education are reduced to a money-making business such as many of the for-profits continue to do with no regard at all for the students or parents behind the “numbers,” it only opens up a fissure in the broad platform of education (which has grown into a major sinkhole) for the inevitable and inescapable misuse (to put it mildly) of anything at all like ethics, integrity, or even basic compliance of any rules or regs at a school.
    And I’m not totally dead-set against the for-profits either. I have seen and had many successes over the years of students who would not have been able to make it anywhere else.
    There has to be some sort of regulations and some sort of body of checks and balances for these institutions, though, or we end up at the point where we now are: Directors, presidents of schools, CFOs &CEOs who have NO IDEA what the word EDUCATION means in REAL TERMS, or any idea as to the real people behind these staggering loads of debt, no idea as to what student counseling means but can only relate to terms that they understand which is the bottom line, their huge bonuses for making “numbers” and total disregard as to how this $$$$$$$$$$$ is procured by the drones who slave under them.
    And one more newsflash for the for-profits: Administering Financial aid and banking are not in any way, shape or form the same thing. I worked under a director in the past (who was in his job from banking to Director of FA for 3 years!) who to this day does NOT know what the terms tolerance or professional judgment when used in financial aid even mean. At the end of the day, all he or any of his superiors wanted to know was why signatures were not procured on student, parent plus, or high-interest private loan papers!
    Come on, get real and start showing some integrity toward the consumer (students) and some respect toward your employees (FA admins who are continually asked to perform illegal acts) or let Obama put you where you belong right now which is out of business.
    I have nothing at all against capitalism or corporate education (an oxymoron?). I just agree with Nancy that some of the for-profits as well as some of the not-for -profits require closer scrutiny and regulation than others.
    I have seen many great outcomes for some students from for-profits. As well, I’ve seen much money wasted at some of the community colleges and larger State schools.
    On the other hand, I’ve also seen many issues from a very few of the for-profits that arise from mere corporate greed and insistence on schools “making their numbers” each quarter from upper echelon CEOs, CFOs, and Directors who have no real knowledge at all of education, student counseling, or compliance with any Federal or State rules and regs. Just get the numbers and we do not care how it’s done – If you don’t make the highly unrealistic “numbers” on a consistent basis you will be fired is their mantra. (and if you have to do something illegal to do it we don’t care but please do not tell us about it). And these “numbers” are required from every employee from the janitors on up through the ranks to instructors, marketing reps, FA reps, directors of every department. . .
    So really, what’s the motivation for anybody to be truthful. Why should an instructor mark students absent or drop them when this is going to affect THEIR “numbers” and THEIR livelihoods and their paychecks?
    Why should an FA counselor whose student is not eligible for Pell and the max in Stafford loans not fudge the fafsa to say that the student’s parents are divorced or “separated” to make the student eligible if this will affect his numbers and his pay? Or create a child for the student to make him independent? If it’s going to affect his pay (As well as the nasty emails and public degradation in meetings because you could not get this student in).
    Most of the students and parents do not even have any idea what kinds of financial aid they are receiving, they are at the school during the admissions/FA process (and it’s a convoluted process!) for so long that they’d sign a pact with the devil just to get out of there. And they’re just happy that there’s not going to be any immediate payments to be made.
    So yeah, capitalism is great when it breeds innovative ideas and better forms for competition, corporate greed, unethical procedures, padding enrollment, and forgetting that there are REAL PEOPLE behind the “numbers” is not.

  • Brian

    I find it quite upsetting that banks get bailouts but yet students and debt holders cannot get any relief in bankruptcy. Something is very very wrong with the way our government puts the interests of corporations above the citizens. I’ve asked for a forebearance from Citibank and they have indicated they are not “sure if we will give it to you” despite the fact that I have no assets and no way to pay right now. I’ve sent out hundreds of resumes and I am no chump. The market for lawyers is appalling and getting worse. People should drop out now unless they are top 10%. Otherwise you will end up like me. Getting five calls a day about your student loans.

  • Jennifer Dana

    I’m sorry for everything you are all going through. This is my Sallie Mae story:
    Sallie Mae
    A warning to students and parents. If you possibly can, avoid student loans like the plague especially SALLIE MAE. No matter what hardships you face in your life, your loan cannot be forgiven except through death. I know through experience. I married shortly after getting my multiple subject teaching credential, and had my first child one year later. My husband was a small farmer and unfortunately the year we were married the North American Free Trade Agreement (NAFTA) was signed into effect by our federal government. This had financially devastating effects on my husband and other small farmers because they could not ethically or legally pay the low wages that Mexico and Canada paid their farm workers. This agreement basically put my husband and numerous other American small farmers out of business. The response of the Federal Agricultural Commissioner was that if small farmers could not compete they should get out of the business. Therefore, basically I became the sole provider for our family.
    I worked as a substitute teacher for several years for the Santa Barbara County Office of Education. My supervisor was very impressed with my work and encouraged me to get my special education credential. It was challenging because by the third year of our marriage we had two children, but I completed my special education credential and due to having to put in hours at the school, I got a student loan because it seemed the only way to accomplish my goal. Unfortunately my supervisor retired and the district hired a new coordinator from Los Angeles. His attitude was “out with the old, in with the new” and he would not consider me for permanent employment. This did not look good on my resume because by that time I had put in several years as a substitute with the Santa Barbara County Education Department. To make a long story short, my husband got kidney cancer and passed away five years later; we didn’t have health insurance for him (except for Medical the last year of his life); I barely supported the family on my meager income, and have been unable to make regular payments on my student loan.
    I am warning you about Sallie Mae because no matter what hardship you face in your life, they are a cold unfeeling company that hires employees who are cold and unfeeling. I had to take off work the last three months of my husband’s life to care for him because he was so sick. The week he died, Sallie Mae began calling me to let me know that my student loan payments were due. There was not an ounce of kindness or sympathy. I was basically harassed. One man actually called me and got me extremely upset on the phone, and then had the nerve to tell me that “I must be the reason my husband got sick and died,” and laughed at me. The Sallie Mae collection callers were beyond cruel in my opinion.
    I really think student loans are a means of keeping the poor and middle class down and controlled by the rich. I think it goes all the way to the federal government because I researched into getting my loan forgiven due to hardship and Laura Bush is actually a board member of Sallie Mae, and of course there is no way to contact anyone.
    Learn from my mistake! Beware of the trap. I feel like getting a student loan especially through Sallie Mae was like selling my soul to the devil.
    Jennifer Dana