For-Profit College Closures: The Next Billion Dollar Taxpayer Bailout?

Tyler Durden's picture

To be sure, we’ve been keen on pointing out the severity of America’s $1.3 trillion student debt problem. We’ve documented not only the inexorable rise in tuition rates and the concurrent increase in total debt outstanding, but also the persistent underreporting of delinquency rates thanks to the way loans in forbearance and deferment are treated in the calculation. Earlier this month we asked if the student debt bubble’s “2007 moment” was at hand after Moody’s warned that some $3 billion in student loan-backed paper may not be fully paid down by maturity (i.e. the defaults are coming). Then on Monday we suggested that depending on how borrowers in IBR and PAYE payment plans are counted, delinquency rates may actually be far worse than even we calculated. Meanwhile, in Louisiana, falling crude prices have blown a hole in the state’s budget triggering funding cuts that may push LSU into the public university equivalent of bankruptcy. 

While delinquency rates for student debt are a major concern in general and, as noted above, are grossly understated in the headline figures, the delinquency and default problem is far worse for loans extended to students that attend for-profit colleges. 

Source: TICAS

This, along with poor graduation rates and allegations of deceptive marketing practices, has led to increased government scrutiny of the for-profit sector, scrutiny which ultimately caused Corinthian Colleges to wind down operations last year amid allegations it falsified job placement rates. The company — which is publicly traded — received nearly $1.5 billion per year in financial aid funding from the government, meaning the US taxpayer was subsidizing federal loans to students who very well may have been getting a subpar education and were thus even more likely to get behind on their loans and eventually default. 

Corinthian was able to sell off many of its campuses in November and although the writing has been on the wall for quite sometime, the company closed its remaining physical campus on Sunday without notice to students or faculty. Here’s more via the LA Times:

After years of government investigations, Corinthian Colleges Inc. will shut down more than two dozen of its remaining schools, displacing more than 10,000 California students. The move ends the turmoil at what was once one of the nation's largest for-profit college chains but presents fresh challenges to students, who now must seek transfers or federal loan forgiveness.

 

The loans were both the lifeblood and the downfall of the troubled Orange County company. Easy access to student debt fueled high tuition and big profits — until the federal government cut off the tap last year, as investigators accused Corinthian of falsifying job placement rates.

 

Many students, attracted by the promise of higher-paying work, now find themselves with heavy debts for degrees of dubious worth. Many others won't graduate at all.

 

The closure, announced Sunday, had been expected for months, but Corinthian gave students and employees almost no notice.

 

For many observers of the for-profit college industry, Corinthian's meteoric rise and fall offers a cautionary tale for other institutions that rely almost entirely on funding from federal student loans and grants.

 

Like many other large for-profit schools, Corinthian nearly doubled revenue to $1.75 billion from 2007 to 2011, as the Great Recession prompted millions of unemployed workers to seek opportunity in higher education and career training. But the company lacked the cash flow to survive after the U.S. Education Department barred its access to student loans last summer.

 

"The fact that a school could be allowed to get so big and so reliant on taxpayer funding — and to harm so many students without action being taken sooner — really exposes the need to reform the system at all levels,”  said Pauline Abernathy, vice president of the Institute for College Access & Success, an Oakland advocacy group that focuses on student debt issues. 

Indeed. So here was an institution that allegedly depended on what were essentially predatory practices to recruit students and funded those students’ enrollment via federal loans. Now that the government has finally pulled the plug after waking up to the fact that it had been lending billions to students who had been lured in at least in part by falsified job placement rates, the displaced students have three options: try to find a school that will accept transfer credits from a for-profit college that’s been shut down by the government, start from scratch at another college or university, or resign themselves to living with a mountain of student debt with no degree to show for it. Well, that’s not entirely true, they do have another option. Here’s Bloomberg:

The abrupt closure of for-profit Corinthian Colleges Inc. may cost U.S. taxpayers more than $200 million in canceled student loans.

 

Corinthian reached an agreement on Sunday with the Education Department to shutter its 28 campuses serving about 16,000 students. Forgiving their debt, if all students request it, would cost the government about $214 million, according to Denise Horn, an Education Department spokeswoman.

 

When a college closes, enrolled students are eligible to have their federal loans discharged, under certain circumstances. Some Corinthian students who are able to finish their degrees by transferring into other programs may not qualify to have their loans canceled, said Daniel Hanson, an analyst with Height Securities in Washington…

 

Six Democratic U.S. lawmakers, led by Senator Elizabeth Warren of Massachusetts, called for the Education Department to grant loan discharge eligibility to include “hundreds of thousands” of students who attended Corinthian’s schools since 2009.

 

The students signed up because of “unfair and deceptive practices,” and should be entitled to relief, according to the letter signed by Senators Richard Durbin of Illinois, Jack Reed of Rhode Island, Al Franken of Minnesota, and Edward Markey of Massachusetts, and Representative Elijah Cummings of Maryland.

 

Consumers Union, the advocacy arm of the Consumer Reports watchdog organization, also called for a wider debt relief program.

 

“We can’t forget the former students who were pulled in with phony claims of job placement, then saddled with a mountain of debt,” Consumers Union said in a statement.

So if you’re keeping track of the ways in which taxpayers may end up on the hook for America’s $1.3 trillion student loan bubble, you can add “forced government shutdown” to the list along with discharge in bankruptcy, debt forgiveness under IBR and PAYE payment programs, and everyone’s favorite, the “cancel all the student debt” initiative. 

But perhaps the most interesting thing to note about this case is that students at for-profit schools are not only more likely to take on student debt to fund their education, but on average have far higher balances than their public school counterparts. 

Source: TICAS

That's because tuition rates at for-profit schools are nearly double those charged by public schools. Exacerbating the problem is the fact that only around 31% of for-profit students manage to graduate in four years versus nearly 60% at public institutions. 

What this all means is that if government scrutinty results in further for-profit closures, nearly every displaced student will be the proud owner of a dischargable loan and thanks to the fact that tuition rates are higher at for-profit schools, the balance of those loans will be, on average, some 54% greater than balances for loans awarded to students at public schools. In other words, the demise of for-profit colleges could effectively represent the next multi-billion dollar taxpayer-sponsored bailout.

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gladih8r's picture

What do we brand this? 

Too Fail to fail ?

y3maxx's picture

..."Kenyan economics"...

y3maxx's picture

..."Fracking College Degree"...

y3maxx's picture

..."California Drought Economics"...

y3maxx's picture

..."Phd in live in parent's basement doctorate"...

SumTing Wong's picture

Why did I have to go to credible schools?

Where's my free shit????

Stuck on Zero's picture

"For profit schools?"  What the hell.  They are all in it for profit.

jerry_theking_lawler's picture

Baltimore...here they are having a 'fire sale' going on....better hurry before all the deals are gone.

Cynicles's picture

If it will hurt America, you know it shall be implemented post haste

napper's picture

Too failed to fail further.

snodgrass's picture

People attend these diploma mills because they can't get in anywhere else. What did they expect?

BlowsAgainsttheEmpire's picture

No.  More shysterism in a crony capitalist paradise. 

legend247's picture
legend247 (not verified) gladih8r Apr 29, 2015 3:12 AM

Since I started freelancing I've been bringing in $90 bucks/h… I sit at home and i am doing my work from my laptop. Th? best thing is that i get more time to spent with my family and with my kids and in the same time i can earn enough to support them... You can do it too. Start here... www.globe-report.com

KnuckleDragger-X's picture

I'm doubtful about a bailout, at least for awhile and forbearence might be possible in the short term, I don't see anything beyond that till after the next election....

corporatewhore's picture

is there anyway Congress can profit on this bailout?

That is the answer as to whether a bailout occurs.

WillyGroper's picture

Well, there's an education these students are unlikely to forget.

Niall Of The Nine Hostages's picture

Corinthian kept a dear school, but a fool would learn in no other.

Niall Of The Nine Hostages's picture

Displaced, as if they were refugees. No, they're just idiots.

You can't cheat an honest man, and nobody stuck a gun to their heads and made any of these "students" attend a diploma mill on money they didn't have.

No. Make them re-pay every cent, as agreed, or send them to prison for fraud, with no possibility of parole till someone coughs up double the dough they stole from the American people.

The female "college students" know exactly how they can get the money back. They need to swallow their pride (for starters) and get on with it. Nobody was going to marry women that stupid with money anyway.

By all means, go after the bigshots at Corinthian too for their part in the fraud. Just don't expect to get more than a fraction of the money back that way.

 

Thisisbullishright's picture

What's a billion among friends....

Chump change!

Kirk2NCC1701's picture

The big private universities don't like cutbacks in tough times, so they will take out the competition if need be, and can't be subsidized. 

CarpetShag's picture

Shit. No more double majors in LGBT studies and basket weaving.

kchrisc's picture

Heads the banksters wins, tails the people lose.
Zion gets the coin.

Liberty is a demand. Tryranny is submission.

             Media
            / Zion \
Financial  <-->   Political

ersatz007's picture

I for one think only rich kids, who can afford it without the need to take out loans, should go to college.  They understand the value of money and are better equipped to get positions in society where they can plan what the rest of us should be doing.    

Niall Of The Nine Hostages's picture

Don't laugh too loud. By early modern times universities were little more than finishing schools for the sons of the idle rich.

You'll know we've turned the corner when the last one shuts down for good for want of children of rich idlers, to be replaced with apprenticeships and trade schools, tuition paid for by employers who think investing in a broader skill set for an ambitious, loyal employee would be a good long-run investment.

If I had to do it all over again I would never have attended university. I'd have taught myself how to code. If I'd still cared to read Plato I could have done so on my own time. Unless it's for a college essay most 20-year-olds have better things to do on Saturday night than read Plato.

Grimaldus's picture

Government involvement in education is a crime.

Government is the biggest murderer/thief/criminal that ever existed and should not be anywhere around education of any kind.

Grimaldus

 

IridiumRebel's picture

Wake me up when Univ. of Phoenix goes down....

Colonel Klink's picture

Not to worry, it'll rise from the ashes.

EDIT:  with money from the government.  SallieMae bailout as well as the rest of the inDUSTry.

WTFUD's picture

DOOM immediately precedes GLOOM.
At the very least these 16,000 students have letters after their names, D.U.P.E.S.

yrad's picture

"I'd like a cheeseburger, large fry, an MBA, and hot apple pie."

"That'll be $56,093.43 at the second window."

Smiley's picture

"Borowing money makes me smarter, TEE-HEE-HEE, I'm going to be a genius after I get my degree, like OHMYGAWD!"

SmittyinLA's picture

Actually there's nothing wrong with these colleges in many cases they do a far better job training and placing people than govt universities that seem to only solicit foreigners for high value positions, the state shut them down for political reasons, their staffs weren't in the correct unions, their students fodder, the insured bankers make a killing (again)

Duc888's picture

 

 

dupe, sorry

Duc888's picture

 

 

Solution: stop paying taxes.

Colonel Klink's picture

Most degrees in the past decade aren't worth the paper they're printed on.  Just like fiat.