In Wake of Credit Crunch, More For-Profit Colleges Lend to Students

January 31, 2011

With private student loans harder to come by, for-profit colleges are making more loans to their students, even while acknowledging that many of the loans will go into default, according to a report released on Monday by the National Consumer Law Center, an advocacy group for borrowers.

After the 2008 market crash, many banks stopped making subprime private loans and ended relationships with for-profit colleges. Since then, all of the large for-profit higher-education companies, except the Apollo Group, parent company of the University of Phoenix, have expanded their institutional loan programs, according to the report.

ITT Technical Institute now derives 15 percent of its revenue from institutional loans, according to the report. Corinthian Colleges was expected to lend about $150-million to its students in the 2010 fiscal year. Some for-profit colleges have said they expect as many as half of their institutional loans to go into default.

Institutional loans serve a dual purpose for the for-profit colleges, the report says. The loans help the colleges comply with the "90/10 rule," which requires them to obtain at least 10 percent of their revenue from nonfederal sources, and the loans increase revenue so the companies remain attractive to investors. But the loans are riskier for borrowers, in part because they tend to carry higher interest rates than federal loans do.

The report recommends that Congress "put some teeth back in 90/10," by including all federal funds in the 90-percent category and prohibiting colleges from counting institutional loans in the 10-percent catetory, among other changes. It also calls on state and federal regulators to provide "aggressive oversight" of institutional loans, a product that it says has "generally fallen through regulatory cracks."