For-profit colleges are having a tough time these days, thanks to the Obama Education Department’s looming new “gainful employment” rules that threaten federal aid cutoffs to an industry that derives 87 percent of its revenue from government loans and grants to its students—along with steep declines in new enrollments (due partly to new federal caps on commissions to recruiters, and partly to the colleges’ own efforts to select students more carefully in order to secure lower default rates) and just plain bad publicity, which seems to have trickled down to potential applicants.
Just this past week four of the largest publicly traded players in the for-profit arena—Apollo Group Inc. (parent company of the 400,000-student University of Phoenix), Education Management Corp., the second-largest for-profit chain, DeVry Inc., and Strayer Education Inc.—reported continuing steep declines in their share prices—as much so that Standard & Poors’ Education Services Index, which reached a high last year of $105.37 in April (according to a Reuters report), closed on Jan. 11 at $81.04. The 20 percent drop just about matched the 20 percent average fall-off in new enrollments that for-profit colleges at the beginning of the year.
For-profit colleges may be in trouble, and their current and former students may be in even bigger trouble (Education Department statistics indicate that 46 percent of outstanding loans to students enrolled at for-profits will ultimately go into default, in contrast to 16 percent of student loans overall), but there is one entity that does not appear to be in trouble at all: the U.S. government, which not only guarantees the troubled loans but, thanks to an Obama-pushed change in the law last year, now originates all of them. A fascinating analysis of White House budget figures recently published the the Wall Street Journal indicates that the Education Department expects to recover “85% of defaulted federal loan dollars based on current value,” as Journal reporter Melissa Korn wrote. That recovery percentage is outstanding, compared with the percentage for other kinds of consumer credit. Banks, for example, as Korn reported, get back less than ten cents on the dollar on overdue credit cards. Indeed , according to White House figures for fiscal 2011, “the federal government expects gross recovery of between $1.10 and $1.22” for every dollar of loan principal extended, Korn wrote. (About $49.9 billion of federally guaranteed loans and loans directly from the government were in default as of Sept. 30, 2010, out of a total outstanding federal loan balance of $713.4 billion).
The federal government makes out well as a creditor because of draconian laws that make it all but impossible to discharge student loans (unlike credit-card balances) in bankruptcy court and ultra-easy for the government to force collection. As Korn wrote, “[T]he government can garnish a borrower’s wages, withhold tax [refunds] and siphon off Social Security and disability payments in order to recover the funds.” (Students whose loans are in default are also ineligible for further federal student aid, which could mean the termination of their educations.) Meanwhile, the longer the loans linger in default, the more interest accrues, and the government tacks on unpaid interest to the principal balance, stretching out the loan’s life, which translates into yet more interest.
One financial analyst, Mark Kantrowitz, told Korn that the government can earn $2,010 more interest on a defaulted $10,000 loan than it would if the loan were paid back over twenty years—and $6,522 more interest than if the loan were paid back over ten years. The government has to pay people to collect the defaulted loans, of course, but it’s still better off than nearly every private-sector loan collector even after collection costs.
All this can make you wonder whether the Obama Education Department and a Democratic-majority Senate that remains determined to push through even more restrictions on for-profit colleges aren’t talking on both sides of their mouths. On the one hand, for-profit colleges have an appalling track record, not only in terms of unpaid student loans (for-profits enroll only 12 percent of the nation’s post-secondary students but account for 24 percent of federal aid and 43 percent of all federal loan defaults), but in terms of overall student success, the kind of success that makes it likely that the loans will be repaid. A report from Education Trust, a Washington think tank, reported this past fall fall that only 22 percent of students enrolled in four-year programs at for-profits graduate within six years, in contrast to 55 percent of students at public four-year colleges and 65 percent of students at private non-profit four-year institutions. Those who do make it to the baccalaureate level leave with a median debt of $31,190 compared with $17,040 for graduates of private, non-profit colleges and $7,960 for graduates of public colleges. They’re the lucky ones. The majority of students who enroll in for-profit programs leave with no credentials and unpaid loans that can mar their entire lives.
But the solution—“gainful employment rules” and caps on the loan amounts that students enrolled at for-profits—seems merely to be demonizing for-profits for the supposed crime of wanting to make money out of higher education. The government doesn’t suffer too much from loan defaults, as the Wall Street Journal story shows. And thus the one thing that the government won’t do is to shut off the spigot of federal loan dollars to all and sundry—the policy that encourages people who would be better off learning work skills on the job to enroll in expensive college classes that they can’t afford and where they don’t belong (hence the high dropout rates). That shutoff would force for-profits to become genuine free-market entities making money out of higher education the hard way—and the honest way—by providing genuinely needed services. But it seems that neither the government nor the for-profit sector wants this to come to pass.