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

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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