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February 02, 2011 10:00 AM How For-Profit Schools Keep the Federal Dollars Flowing

By Daniel Luzer

High student loan default rates for people who attended for-profit schools are old news. Both detractors and advocates of such schools have debated the implications of the debt extensively.

Supporters of for-profit schools generally point out that default rates aren’t their fault; the students they enroll are from low-income families in which “financial responsibility is likely not stressed from one generation to the next.”

But it turns out for-profit schools may be very much aware of what happens with these loans. Indeed, according to a recent study released by the National Consumer Law Center, student loan defaults appear to be just another part of how they operate.

Many banks got out of student lending when the financial crisis hit in 2008 and poor rates of repayment for student loans started to become risky. And so for-profit schools got into the loan business themselves; lately proprietary colleges have been offering more institutional loans to students.

According to the report:

The proprietary school executives could have viewed the pull-out of the third party creditors as a warning sign that lending without regard to repayment caused significant harm to their students. Instead, many proprietary school executives chose to create or expand institutional loan products. They did this even though their students were already struggling with student loan debt, both federal and private, and even though most knew that a majority of their students would not be able to repay the new loans.

Interestingly, it appears for-profit schools mostly lose money on these institutional loans. “The schools seem to view these loans more as “loss leaders” to keep the federal dollars flowing,” the report explains.

It’s essentially a gimmick. These companies offer bad loans to students so that students will continue to enroll and bring with them the federal money, grants and government-backed loans, on which for-profit colleges actually make money.

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer