Who Is Stoking The Trillion Dollar Student Debt Bubble?

When it became apparent that the US taxpayer would likely be on the hook for the discharge of billions in federal aid awarded to students who had attended Corinthian Colleges (the now defunct for-profit institution that was forced to wind down operations in the face of government scrutiny) critics didn’t so much question whether the government should forgive the loans, but rather why the loans were extended in the first place. Allow us to explain. 

There’s a very serious debate raging in America about whether it’s appropriate for the federal government to forgive student loans. Some commentators rightfully assert that when it comes to federal loans made to students who attend public schools — where, even if the education they receive doesn’t exactly prepare them for the jobs market, graduation rates are at least respectable and the admissions process is not riddled with fraud — personal responsibility should be taken into account and borrowers should be expected to pay off their debt. 

The argument changes a bit when the conversation shifts to for-profit schools. In many cases, these institutions employ deceptive recruiting practices including falsified graduation and job placement rates to lure students who, once accepted, are encouraged to lie about their circumstances in order to maximize the amount of government aid they’re eligible to receive. These schools live and die by federal student loans as around 90% of students pay for their ‘education’ with debt. And while the government (i.e. the taxpayer) keeps the doors open, CEOs (in many cases the schools are publicly traded) reap millions in compensation. 

The government has been aware of this arrangement for years and yet the schools were (and still are) allowed to operate. Because students who attend a school that is deemed to have committed fraud can apply to have their federal loans discharged, the Department of Education is taking an enormous risk by extending billions in credit to students who attend schools that the department likely knows will eventually be shut down.

So, as we said above, when it comes to loan forgiveness for students who attend defunct for-profit colleges, the real question is not whether the students deserve to have their debt forgiven (they very well might, insomuch as they have been defrauded, much as one would expect to be reimbursed for a defective product) but rather why the government is acting irresponsibly with taxpayer dollars in the first place. 

Against this backdrop, consider the following from WSJ, who has more on the misappropriation of federal student aid and the role played by accreditors:

Most colleges can’t keep their doors open without an accreditor’s seal of approval, which is needed to get students access to federal loans and grants. But accreditors hardly ever kick out the worst-performing colleges and lack uniform standards for assessing graduation rates and loan defaults.


Those problems are blamed by critics for deepening the student-debt crisis as college costs soared during the past decade. Last year alone, the U.S. government sent $16 billion in aid to students at four-year colleges that graduated less than one-third of their students within six years, according to an analysis by The Wall Street Journal of the latest available federal data.


Nearly 350 out of more than 1,500 four-year colleges now accredited by one of six regional commissions have a lower graduation rate or higher student-loan default rate than the average among the colleges that were banished by the same accreditors since 2000, the Journal’s analysis shows.


“They told me I could build a future there,” says Rachel Williams, 24 years old, who dropped out of Kentucky State University in Frankfort in 2013 because her family couldn’t afford the college anymore and she was losing faith in it. She amassed about $34,000 in federally backed loans.


Kentucky State has a graduation rate of just 18%, and nearly 30% of students who began repaying their loans in fiscal 2011 had defaulted within three years.


The Southern Association of Colleges and Schools Commission on Colleges reaffirmed Kentucky State’s accreditation in 2009. A preliminary report by the reviewers made no mention of loan defaults and praised Kentucky State for plans to improve its graduation rate.

One problem may be that the accreditation game suffers from similar conflicts of interest as those which caused ratings agencies like Moody's and S&P to rate subprime-ridden MBS triple-A in the lead-up to the crisis:

Accreditors say their job is to help colleges get better rather than to weed out laggards. Colleges pay for the inspections, which can cost more than $1 million at large institutions.


“You’re not there to remove an institution,” says Judith Eaton, president of the Council for Higher Education Accreditation, a trade group. “You’re there to enhance the operation.”


The government has relied on accreditors as watchdogs since the 1950s. 


the current accreditation system is drawing more scrutiny as college costs climb farther out of reach for many American families. Outstanding federal student-loan debt has doubled to $1.2 trillion since 2007. In the past decade, the amount of loans and grants awarded annually has jumped more than 50% on an inflation-adjusted basis, reaching $134 billion last year.


The $16 billion sent last year to students at colleges that graduated less than a third of their students was nearly 20% of all the loans and grants to students at four-year institutions.


The overall graduation rate for four-year colleges is about 59%. About 11% of students at four-year colleges who started repaying their loans in 2011 defaulted by the end of 2013.


“It’s a national scandal that we’re pouring huge sums of money into schools with very, very low graduation rates,” says Richard Vedder, an economist at Ohio University and director of the Center for College Affordability and Productivity, a think tank.

Indeed, the following description of the relationship between accreditors and colleges sounds like it could have been ripped straight from the pages of a book about Wall Street:

Arthur Rothkopf, a former president of Lafayette College, says the relationship between accreditors and schools can be too “cozy.” While he was leading the Pennsylvania college, he was assigned by the Middle States Commission on Higher Education to review the U.S. Military Academy in West Point, N.Y.


Mr. Rothkopf says he was friends with the West Point superintendent at the time, and the two men had stayed in each other’s homes. He is now an adviser to the Education Department and has advocated for breaking the link between accreditation and federal aid.


In April, a Journal reporter observed an accreditation review at Western Kentucky University in Bowling Green after agreeing not to disclose the content of the discussions. The reviewers were serious and focused, and the atmosphere was collegial.
Western Kentucky delivered souvenir-filled gift baskets to evaluators’ hotel rooms and treated the reviewers to steak dinners. “We didn’t do anything at WKU that I haven’t seen done at other institutions,” said Richard Miller, vice provost at Western Kentucky, where the graduation rate is 50%.

Consider the above, then consider the following from The Heritage Foundation:

Alarmingly, and in a manner that parallels the history of many licensing systems, accreditation now suffers from numerous conflicts of interest. For instance, regional accrediting agencies are financed in part by college and university membership in the associations. Colleges are dues-paying members of accrediting associations that determine their accreditation. Consequently, accreditors are more reluctant to deny accreditation renewal, an action that would result in the loss of dues-paying members of the association. “The desire to maintain collegiality and not to lose paying association members raises conflict of interest issues that make the regional accreditors questionable gatekeepers for eligibility for federal funds.”[21]


Moreover, removing a college’s accreditation status could mean that a regional accrediting agency loses students to other parts of the country and, hence, to colleges accredited by other regions. This reality creates further perverse incentives to accredit institutions of questionable quality.


Ultimately, these conflicts of interest have created a system whereby accreditation agencies are inclined to protect the interests of existing colleges and universities.

What all of this means is that just as the conflict of interest between ratings agencies and banks' securitization machine ultimately contributed to the unprecedented Main Street-funded bailout of Wall Street, so too is the cozy relationship between accreditors and schools contributing to the $1.2 trillion student debt bubble which, in the end, will burst in spectacular fashion necessitating across-the-board debt forgiveness and a heretofore unimaginable loss for the US taxpayer.