10 April 2012

The Rock Meets The Hard Place: Student Loans and For-Profit Higher "Education"

When teaching Bankruptcy, I tell my eager students on the first day that they shouldn't be taking the course with hope of immediate personal gain. Students loans are nondischargeable. Technically, that's a slight overstatement; student loans are dischargeable if repayment would cause "undue hardship." Given the powers of the Department of Education to modify and extend loan payment schedules, however, the requirement of undue hardship is rarely met.

Over the past six months or so I have posted a number of entries in response to various criticisms of legal education (here, here, here, and here for starters). It isn't merely the cost of legal education that concerns many of its critics, or even legal education's alleged failure to teach skills (which, of course, would increase costs all the more); rather, the primary concern is--or at least should be--that students can easily add $100,000 or more of student loans on top of debts they incurred as undergraduates. Of course, Ph.D. students have known for a long time that there's rarely a way to cover the cost of their doctorates but law students for many years were able to pay their student loans.

But let's move a few steps down the higher education food chain. Perhaps there's little sympathy for graduate and professional students who foolishly incur substantial debt but what about high school graduates who receive federally guaranteed student loans to attend for-profit "schools" 65% of whose graduates are not gainfully employed after graduation. That's two-thirds, folks. Two-thirds of graduates who are not "gainfully employed!"

Jean Braucher has published an useful piece (abstract here): Mortgaging Human Capital: Federally-Funded Subprime Higher Education. Here's her thesis:
For-profit colleges built their business model on rapid growth, fueled by aggressive recruiting and high use of federal student aid (both grants and loans) to pay high tuition and fees. This model has produced large student debt burdens and high defaults. The defaults are symptomatic of an underlying pathology: although the mission of career colleges is to improve employability and earnings, placement in good jobs has not lived up to recruiters’ claims.
I'll leave aside Braucher's painstaking analysis that justifies her conclusions. I will note, however, that it has been practices of the federal government (such as subsidizing student loans at the outset and later removing any limit on the interest rates that it would subsidize) and intense lobbying of Congress to limit additional oversight of for-profit schools that has exacerbated this sorry state of affairs. Rent-seeking and agency capture at their finest!

Here's how it's done:
The career colleges have a nearly perfect system of avoiding skin in the game. When students get federal grant aid and student loans to attend college, the schools get paid up front and do not bear the loss when former students default later after leaving school

Just as "the American Dream" of home ownership fueled extraordinary federal subsidies of borrowers who should not have qualified for mortgage loans, which led in turn to the housing bubble, so so federal intervention--supported by members of both parties--has created a student loan bubble.

Although Braucher doesn't address it, I wonder if there is a parallel phenomenon among non-profit schools. The average repayment of student loans by those who attend non-profit schools greatly exceeds for-profit grads. Similarly, gainful employment of non-profit graduates exceeds their for-profit conterparts. Differences in wealth, income, and secondary education levels can account for only part of this differential. Absurd federal subsidies and predatory sales practices account for most of it. But on further analysis, would we find a comparable differential among non-profit schools? I'm thinking primarily of those that invest heavily in distance so-called education but there are plenty of others that might fit the profile of the student/student loan scam.

Self-examination is the first step toward virtue. I hope schools that might be at risk for using students as a means of feeding at the public trough get straight before it's too late.

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