70% Defaulted in 2013

To add to this attention getter, 70% of all the students who defaulted in 2013 went to non-traditional schools or “for-profit” schools. Of students who graduated from traditional schools and were required to start paying back student loans in 2011, two percent of graduate students and eight percent of undergraduate students defaulted as compared to ~21% of students from non-traditional schools within two years. Mind you, this does not exonerate traditional schools from the financial burden placed upon graduating students. The only cost increasing at a faster rate than healthcare is the cost of pursuing a college education.

invisible hand

In 2000, one nontraditional school of the top ten schools was the second highest with associated student loan debt to attend it. University of Phoenix was second to a traditional school at $2.1 billion. In 2014, the University of Phoenix moved to #1 at $35 billion of associated student loan debt to attend it. Of the next 10 schools, 8 were non-traditional and 2 were traditional schools in 2014. New York University went from 1st on the list in 2000 to 8th on the list in 2014 with triple the amount of student debt associated with getting a degree there. The number two school in 2000, University of Phoenix amassed student loan debt of $35 billion to attend. This was more than 17 times what the University of Phoenix had in 2000.

The numbers of student loan borrowers doubled from 2000 to 2014 to 42 million and the debt quadrupled to $1.1 trillion. With this explosion in borrowers and increase in debt, defaults reached its highest level in 20 years. “Half of the borrowers exiting college in 2011 had attended a for-profit school or a 2 year college and represented 70% of the student loan defaults. As reported in “A Crisis in Student Loans?,” the default crisis centered around borrowers who attended non-traditional schools such as Phoenix and to a lesser extent two year colleges. In the past those who attended non-traditional schools represented a small portion of borrowers and those attending two year schools did not require borrowed funds to attend. So what changed?

Student loans are the roach motels of the banking/lending industry. Once you sign on the dotted line at 18 years old, you are little more than an indentured servant to the ultimate bill collector, the government, until the loan is paid off or you become disabled or die. This type of loan can not be discharged in bankruptcy. However, this is not just a story about young men and women going to college at 18. From 2000 onward with the decrease in higher paying and lower skill jobs, many older and low income people went back to school to improve their skills and knowledge in the hope of becoming technicians, nurses, etc. Especially in 2008 and afterwards when companies laid-off thousands of people, Labor went back to school as a panacea to lack of work. It did not work quite as they had hoped.

Schools and especially nontraditional schools engaged in deceptive advertisements for job placement and graduation rates advertising their offering of additional education in specific fields as the elixir to a lack of jobs in the less skilled fields. I am sure you have seen the TV commercials and billboards advertising making more money. Furthermore, most nontraditional schools did not offer grants or scholarships; however, the lower income students were eligible for the ~$5,000/year Pell Grants. 73% of the lower income students enrolled in nontraditional schools applied for these grants as opposed to 37 to 45% of students at traditional colleges and universities. Unfortunately, the Pell Grant paid only a portion of the average yearly tuition of ~$15,000 at a nontraditional school.

Nontraditional school students ran up against a limitation on Federal backed loans. The Federal Government restricts what an 18-year-old undergraduate can take out in loans to ~$31,000 and ~$57,000 for older, independent students. As a result, students at nontraditional schools needing more money turned to the shark-pool of commercial loans which also can not be discharged in bankruptcy and with the government acting as the “ultimate” bill collector again. Some nontraditional colleges also offered in-house student loans. Now in bankruptcy, Corinthian Colleges was one of the nontraditional schools offering their “Genesis Loan” with an interest rate sometimes as high as 15%. Finally waking up after the bankruptcy, the Consumer Financial Protection Bureau is suing the college for setting tuition as high as $75,000 for a bachelor’s degree forcing students to take loans, guiding students to in-house loans to pay the tuition, and partaking of some of the lender loan fees. This was also a practice engaged in by traditional schools, which ended in the late nineties as the government cracked down on the practice

As Adam Looney and Constantine Yannelis reported in A Crisis in Student Loans? the numbers of those defaulting on educational loans has dropped for nontraditional for-profit schools which means the twenty year high will also decrease over time. I would point out the schools such as the bankrupt Corinthian Colleges as well as DeVry, Kaplan, ITT Tech, and others are under government investigation for deceptive recruitment tactics, falsifying job placement, and graduation rates. There has been no solution for the thousands who took out loans in the hope of bettering their future. In the mean time, the government will continue ham-fisted-bill-collecting role for private businesses making the loans.

These are the Schools Driving America’s Student Loan CrisisJim Tankersley and Danielle Douglas-Gabriel, The Washington Post, September 10, 2015

A crisis in student loans? Adam Looney and Constantine Yannelis, BPEA Conference Draft, September 10 – 11, 2015