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December 16, 2009 6:46 PM Whose Fault Default?

By Daniel Luzer

Debt2.jpg

There’s an interesting piece over at Center for College Affordability and Productivity about for-profit colleges and the student loan default rate. As numerous people have written lately, students attending for-profit colleges have much higher student loan default rates than other students. As Daniel Bennett writes, however:

The most important cause of this [default rate]-the market-funded sector (aka for-profit) enrolls a disproportionate share of disadvantaged (low-income and minority) students.
So what are the implications of this evidence? Many of these disadvantaged students come from less affluent families in which financial responsibility is likely not stressed from one generation to the next. They also are much less likely to have parents or peers who have direct knowledge of or experience with the college process, making it harder to navigate the complex world of applying to and funding higher ed. Such students are not likely to fully comprehend the consequences of failing to complete school or not paying their bills. These factors make disadvantaged students more susceptible to dropping out and defaulting on their loans.

Duly noted. But the implication here is that people default because of some ambiguous sense of “financial responsibility… not stressed from one generation to the next.” So students at for-profit schools default because of a lifetime of poverty? Now the financial irresponsibility of the poor may very well be a real thing, but the best way to become financially responsible is to make more money. The fact that more than 20 percent of students from for-profit schools default after three years is not evidence of some carryover bad financial habits from impoverished childhoods; it actually seems to indicate that they don’t make enough money after graduating to pay off the debt they incurred. That means that, in the most basic sense, a school like the University of Phoenix or ITT Technical Institute doesn’t actually work.

Ben Miller over at Education Sector’s the Quick and the Ed takes on this issue directly, pointing out that:

For-profit colleges sell themselves as opening up new doors for students who want to launch a career in any number of fields. Presumably, providing this opportunity should lead to financial betterment and thus justify the expense of paying for the education that makes it possible to obtain that new job. At the same time, these schools then turn around and claim that their students come from low-income backgrounds so in large numbers they will not be able to achieve these dreams and will instead drop out and likely default. So which is it? Either the school can provide this opportunity, or it simply cannot. If it’s somewhere in the middle then maybe they would be better off marketing themselves as kind of a higher education lottery—spend $30,000 at a chance to make it big or lose it all.

For-profit schools are based on the premise that assuming large debt is appropriate for education because it ultimately gives students skills to make the money for that to be a good decision. This is an established concept, one very familiar to anyone who went to, say, law school.

But assuming debt for education is only suitable in preparation for high income professions. Regular schools understand that undergraduate debt is very, very burdensome for low income students, even those who attended very exclusive colleges. This is why many colleges now have policies so that students from low income backgrounds will graduate debt free. This is the very best thing to give students: a free, high quality education.

It may very well be a profitable business model to educate low-income students by saddling them with massive debt but it’s hard to see that as a good model for education.

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

Comments

  • Daniel L. Bennett on December 17, 2009 12:05 PM:

    Thanks for continuing this discussion. I agree with both you and Ben that more can be done by the institutions themselves to improve this problem of high student defaults. They are bad news for the individuals who default, as well as for the taxpayers who fund them.

    The reality is, however, that the students attending for-profit institutions are largely from disadvantaged backgrounds - many of them marginal and/or nontraditional students who are unable to attend classes at a public school during the normal meeting times (M-F afternoons) due to other commitments (work, family). Many of them also want to learn a vocation and not sit through lectures on sociology or literature. I've heard from many working in the for-profit sector that a significant portion of their students previously attended community colleges, but dropped out because their needs were not being met. Our public system of higher education has failed to meet this rising segment of the population's needs. This has created a market for private providers to step in and fill the gap.

    Now, these for-profit providers also happen to admittedly operate a business and as such, have an incentive to make their operations as efficient as possible. The federal financial aid system (notably the loan program and 90/10 rule) effectively set the price that these providers can charge, which is above the cost of provision and hence, generates significant profit margins. It also enables students from less affluent backgrounds to rack up large amounts of debt, which are very difficult to pay off.

    But let's not forget that we hear many horror stories about students graduating from traditional colleges with hundreds of thousands in debt with a BA in medieval history or performing arts. What are traditional schools doing to prevent this type of outcome? Also, it is possible that some students from more affluent families who graduate from traditional schools with massive debts are barely keeping their head above default because their families, with the means and understanding of the negative consequences of debt, pitch in to help them avoid such a bad scenario -a luxury that the less affluent students don't have.

    The widespread financing of higher education is becoming an increasingly dangerous proposition as tuition continues to soar. Institutional accountability for student outcomes is sorely needed, but it should be across the board and not specifically targeted at one particular group. That is, after all, a form of protectionism.

    http://collegeaffordability.blogspot.com/

  • problemwitcharing on December 17, 2009 2:30 PM:

    "But let's not forget that we hear many horror stories about students graduating from traditional colleges with hundreds of thousands in debt with a BA in medieval history or performing arts. What are traditional schools doing to prevent this type of outcome?'"

    I appreciate this person coming here and responding thoughtfully to the points the blogger laid out in the post, and taking the unenviable position of defending proprietary schools.

    "Career college" primarily exist as an option to higher education institutions that offer critical thinking courses like the "medieval studies" example you gave. They both ostensibly perform a service. So here is what "traditional" or not-for-profit institutions typically do to ameliorate the "horror" you just mentioned:

    1) Limit or avoid marketing courses, majors and degrees offered (including "BAs in medieval history") as "successful" career paths or "ways to get ahead" that "other people can do - and so can you!!"

    2)Avoid targeted advertising for-profit aimed strictly at low-income, minorities, and/or working class students, who are will not be eligible for no-cost aid.

    3) Refrain from promising job placement as "guaranteed" or at least articulate the difference between placement service availability and assurance of job placement.

    It is wrong to let the few benefits some of these diploma mills have brought higher education (accelerated courses, distance learning) to overshadow the rampant amounts of fraud, waste, and abuse.

    This isn't about protectionism. It is about consumer rights, taxpayer rights, quality education standards, equity, and fair business practices. These for-profits receive more federal aid/per student enrollment than public community colleges and should be held to the same standards.

    If not, I would like to hear why not.

    Thanks for the discussion.

  • Alan Collinge on December 15, 2012 3:27 PM:


    The federal student loan system has become predatory due to the Congressional removal of standard consumer protections and congressionally sanctioned collection powers that are stronger than those for all other loan instruments in our nation's history. The resulting lending system is causing great harm to citizens who borrow for college, but also causes harm to all students due to the unchecked inflation that is enabled by this problem. Other systemic problems have also arisen within the lending system as a result of the financial motivations of the various system elements being aligned against, instead of with the students. These include a high default rate, poor quality of education, poor loan administration, systemwide corruption, inexcusably bad oversight, governmental secrecy, and others.


    Importantly: this problem is virtually guaranteed to persist in the re-architected, Direct lending system in its current form, and could even be exacerbated. In the public interest, the consumer protections that were removed by Congress must be restored by Congress at the earliest opportunity. By returning these consumer protections, the motivations of the system's functional elements will be reoriented such that most, if not all of the deficiencies mentioned above will go away over time. Unless fundamental protections (namely, bankruptcy ) are fully restored, at a minimum, these problems will persist, grow, and be largely impervious to legislative or other fixes, no matter how well designed and implemented.