Half of Money Lent to Students at For-Profits Will End Up in Default, Government Predicts

Wow! This Tucker guy has a lot of spare time on his hands.

Wow, yeah, that was LONG but informative, Robert W Tucker. And I happen to agree with you: “estimates” and “predictions” mean absolutely nothing unless they take into account ALL the contributing factors of an issue. It’s not just that for-profit colleges and universities are the problem: the students entering these higher education institutions bring with them contributing backgrounds that may or may not allow for a higher default rate. And the fields many of the for-profit colleges aim to prepare students to enter into are SATURATED right now because of the economy. THAT will play a huge role as well in the number of defaults we see in the future.

Don’t just blame the for-profit system; it is simply one more weight on the side of default probability.

The for profit education industry wants to get as much revenue as possible as quickly as possible. Because money is paid upfront by DOE the company’s are cash rich, hence, the strong balance sheets. There is a direct link between Title IV receipts and revenue recognition. This is probably what the SEC is after. The group has an incentive to look the other way when recruiting students that have no business being in school and call it providing opportunities for the poor. They look at the Excel spreadsheets in the ivory tower, never really rolling up their sleeves to see what the enrollment counselors were saying or caring as came out in the Harkin hearings. Since Computer Learning Centers in 2000, this has been their policy hence the growth, particuarly in Pell recipients in the last 3 yrs. Really, what we are talking about is a small group of individuals, senior management of public companies, that think they are being creative, but what they are doing is committing fraud and getting away with it over and over and over again for a long time. Eventually, you forget that it’s fraud, but it’s still fraud. It’s called denial and rationalization. This industry is a Ponzi scheme, coming apart at the seams in 2011 especially for the most egregious schools with the highest drop rates/ default rates, low graduation rates, and lowest repayment rates. Their balance sheets are evaporating. The DOE is not prepared for this onslaught and other regulators have been naive until recently. Unfortunately, they are slow and that has hurt tens of thousands more unknowing students. That includes the state AG’s, DOJ, as well as the other feds. You’ll see. The only question for management is, “What color do you want your jail cell next to Bernie Madoff?” Like 3rd year defaults, lifetime defaults is just another example of the corruption. Hopefully, given new information about how they are hurting the morale of our troops, maybe the military, will do the right thing and pursue them. 90/10 should be 50/50 and advertising using public money should outlawed. That will improve repayment rates over time.

Perhaps even more surprising than the default rates at for-profit colleges are the default rates at community colleges. The budget lifetime default rate for community colleges is about a third, much higher than most people expect. The cumulative lifetime default rates are also in the same ballpark as at for-profit colleges. The main difference is that students at community colleges are less likely to borrow and borrow less because of direct state subsidies.

I appreciate the dialog here and apologize if I permitted my ire to be stimulated by this, the umpteenth piece of stunning illogic on this topic.
With respect to this discussion, I would remind us all that one of the major bases for our prescriptive comments, on any side of the issue, is the presumption that taxpayers are going to lose a boatload of money on these loans. We will not. You have to die to discharge these obligations. Eventually, almost everyone pays up. This is a part of the federal sleight of hand. Ask Secretary Duncan how much money, net, the feds will realize on “defaulted” loans. When the loans were private, the feds grossed $110-120 for every $100 “defaulted” (penalties and fines are the reason) but there were third-party collection costs to charge against that value. Now that the loan system is part of the federal debt collection database and system, collection costs can only plummet to near zero. When you add back the fines, there is a chance that taxpayers will net more “profit” from defaulted loans than from non-defaulted loans. Add to this the fact that “default” *most often* means nothing more than a temporary aberration in the repayment calendar, and you are beginning to get the picture.
What are the real problems? The entire process needs process management rather than after-the-fact outcomes assessment, as is currently the best we do and that not always well. We fail to match the type of assistance with need, ability to pay, ROI, and other important determining variables.
I assume we are all aware of the abuses that existed in the private student loan sector. They were not widespread and could have been managed by putting these people behind stiff fines or jail bars. I must know 500 people who are paying back student loans. Not one of them was mistreated or paid inappropriate fees or rates. When will some people learn that the feds exploit problems to gain control of heretofore non-federal business. When the problems are gone, the federal control remains until no one can remember it being otherwise.
It looks like the lid is about to be blown off the Harkin hearings and the GAO audit. Take a look at these most recent documents: http://www.intered.com/private-sector-documents/tag/gao Politics is being played on all sides and it appears that the GAO may have got caught violating its principles.
The above reference to Madoff is too sophomoric to deserve response and may be a short-seller in disguise. This kind of uninformed junk is fuel for the politicians’ manipulations. We need to wise up.

I’m all for community colleges but the above commenter needs to do his homework. The most wildly optimistic projections suggest that the community colleges might be able to ramp up to address 15-20% of conservatively projected need . . . at a much higher taxpayer cost than for-profit alternatives. Its a good expenditure in my opinion but we need to realize that we pay much more for it than we pay for the for-profits, even with their service to more of the defaulting class of students. When we control for student inputs, the results are about the same, only the locus of financial responsibility is different.

I assume, Mr. Tucker, that you work for a for-profit school?

Are you arguing that a 50% default rate is acceptable, or inaccurate?

As an Executive Director of an accrediting agency that accredits career-oriented for-profit institutions, I take umbrage to the comment made by “msghighered” that community colleges “have much higher standards” due to regional accreditation. Not to take anything away from my regional colleagues, but just as Mr. Tucker tires of “unethical political practices,” I tire of the uninformed and baseless biases that permeate all things connected to for-profit education – to include accreditation. I invite msghighered and others who share this bias to read the ACCSC Standards of Accreditation before making such ill-informed generalizations.

Mr. Tucker’s misdirection is in the category of “He doth protest too much.” Instead of looking at the wealth of info that is available, he deftly shifts to what is not available – a stock-in-trade of those who don’t like the existing evidence. He sounds like one of those who balks at all federal data on unemployment, census, trade balance, tomorrow’s weather forecast, and so on – unless someone whose last name is Bush is in the White House, in which case questioning any federal data is a starkly treasonous act. Bob, I trust you believed the vast “data” on WMDs of eight or nine years ago. How’s that working out for you? After 9/11, we should have had a couple years of detailed analysis, meeting intensively with experts from nations who had dealt successfully with similar existential threats within their own lands for decades, and only then pursued a well-thought-out response, instead of lashing out reflexively within weeks in a very military way to “send a message.” Unlike the murky world of intel, where the byword is “please trust us, we can’t tell you anything, though,” a lot is available in the domestic federal programs.

Unfortunately, most of default is not explained by “income and socio-economic status, parents’ level of education, and a few more.” A wide variety of existing research by states and nonprofits points to factors such as dropping out of college — factors generally well within the control of the college to address. It turns out that the institution or program you attend does have some bearing on propensity to default.

Is it cast in stone that your destiny is driven by your grandparents’ socioeconomic circumstances? Sounds very George Lucas. In addition, the situation where such comparisons are perhaps easiest to correlate — traditional dependent undergraduate students — is fading into the dustbin of history as independents are now by far the majority of undergraduates. Are we saying that, just because you work part-time (or fulltime) as a cashier during your postsecondary education, then this means you will always be a cashier after you graduate? If so, what does that say about the bill of goods the career schools are selling to their recruits about the vaunted American tradition of “upward mobility.”

Worst of all, accepting “SES as destiny” as a fact would let schools completely off the hook for outcomes and performance effectiveness. Why spend any money on mentoring, counseling, and so on, for the purpose of improving retention and graduation rates, if the results are all pre-determined by SES anyway?

“Cooking statistics”? A harsh accusation, again without basis in fact. The supporters of for-profits are the ones who have tried the hardest to change the measurements to accommodate their situation, and their ample Congressional campaign donations have led many Beltway types to forget that not every postsecondary student attends a for-profit school, and there are many other issues out there besides bending all legislation to the convenience and benefit of their business model. Remember the 50% rule. Gone like the wind. Remember the 85% rule? Quickly morphed into the 90% rule, except the other 10% becomes more and more squishy every time Congress meets.

The definition of a default is the same no matter which type of school the student attending – and even if there was no school involved at all in the loan disbursement process (consolidation loans). The example provided to “document” the disparate, “onerous” treatment of for-profits actually ended a decade ago. (For non-degree granting proprietary schools only, students who had received Direct Loans were included as defaulted loans in the schools’ cohort default rates if, for 270 days within the cohort period in question, the students were in repayment under an income contingent repayment [ICR] plan with scheduled payments that were less than $15 per month and less than the interest accruing on the loan.) It only impacted a handful of borrowers each year. And it was originally installed by opponents of direct lending, not by opponents of for-profit schools. Consolidation is never counted as a default for any school’s rate calculation, unless the borrower then defaults on the consolidation loan within the 2yr CDR time period. If anything, consolidation pushes some borrower-level defaults out of the time period because the borrower (and the school) gets a fresh delinquency clock re-set.

Is (a) default rate separate from (b) net defaults? Yes, because (b) consists of (a) plus the post-default recovery rate. Both assumptions are provided transparently and separately in the President’s budget. (CBO provides its subsidy rates but not all of the underlying assumptions.)

For examples,
http://www.gpo.gov/fdsys/search/pagedetails.action?granuleId=&packageId=BUDGET-2011-FCS&fromBrowse=true
and
http://origin.www.gpo.gov/fdsys/pkg/BUDGET-2011-FCS/xls/BUDGET-2011-FCS-5.xls

Nationalized? Hmm. The guaranteed loan program was a standardized, national social justice program dominated by inefficient, noncompetitive, unionized state bureaucracies receiving massive federal subsidies, while direct lending is run largely by private companies under competitively-issued contracts. Direct lending may have marginally more “federal” involvement/management in the mix than guaranteed lending, but it is not clear at all that direct lending is any more “government-ish,” as a whole, than guaranteed lending.

While no one can go into a time machine, travel to 2030, and see what defaults actually occurred between 2010 and 2030, the Federal Credit Reform Act of 1990 mandates financing federal direct and guaranteed credit programs using calculations of net present value of estimated positive and negative cash flows, just like a private bank or any other lender does. It is way over-the-top to say that using a standard, time-tested bank methodology should result in sending everyone to jail. If anything, the experience of 2008 indicates that those in the “loan business” (mortgage, credit card, commercial, small business, automobile, etc.) were the ones making careers out of lying, not those in the student loan segment.

Andrew Cuomo and some abuses identified in the guaranteed student loan program? It garnered some headlines, sure, but was not the reason for phasing out guaranteed lending. When you have someone like Sallie Mae, the paragon of Wall Street, which at its peak had an operations about the size of direct lending but requiring eight times as many employees to do the same job as direct lending, you see the huge amount of administrative and marketing overhead which had to go. If the USA had an education loan program that offered markedly different program features separately to 6000 individual postsecondary institutions, then, yes, the marketing overhead would be needed to parse all of that out to everyone. But this is a standardized loan program in which the loan application/promissory note is published in the Federal Register, for goodness sake. If you told the 1988 Newt Gingrich that there was a way to deliver the same loan product to students and not only spend less federal money but actually make money federally, yet this would cost a lot of bank employees and state bureaucrats their jobs, you think he would go for it? You betcha. As a fighting conservative in the Congressional minority, Newt was a direct lending advocate. It was only when the issue became politicized in the early 1990s that most of his people switched sides. If all it took was minimal federal cash annually to get states and banks to participate, guaranteed lending would be a strong option. Unfortunately, the level of payments, which became increasingly non-transparent over the decades became high, as during the 1970s and 1980s states and banks successfully sold Congress on the idea that they needed far more generous subsidies to participate. The final straw for guaranteed student lending was that, once the word “bailout” became a basic tenet of tea party philosophy, the so-called “banksters” became even less popular with libertarians and conservatives than with liberals and progressives. It was at that point that the aging arguments in favor of guaranteed student lending finally became completely untenable.

No Problem. Just put liens (or sue to collect/recover) on the Company’s, Corporation’s who own these “fly by night” operations. After all, it was them who approved loans to large numbers of “students” who had zero chance of succeeding; and ergo zero chance of repaying.

The opinions by Robert W. Tucker may be by the same Robert Tucker who is “President of InterEd and former Senior Vice President of the University of Phoenix” http://www.intered.com/nasulgc/ . If so, he is hardly an unbiased commenter, and may indeed not be doing this on his “own time,” but being remunerated and/or acting out of self-interest.

Again, the good people folks at Murray’s Discount University (formerly House of Windsor Intergalactic Royal College, and before that The Aerospace Academy of Nutrition and Nail Design) protest the anti-profit bias of people like Sen. Harkin, those at the U.S. Department of Education, and all too many of the commenters on this thread. (MDU, remember, is a member of the Coors Lite Ed family of companies (which includes the Laetrile School of Medicine, the Schystere School of Law, Super Mario College Preparatory Academies, and the Fagin Pre-Schools), with over 4800 locations in strip malls in all 50 states.)

Student loans are the lifeblood of our enterprise. One of our mottos (we have several, depending on the situation) is, “The principle of our curriculum will attract your interest.” If our default rate weren’t what it is, we wouldn’t be able to create the volume of churn that keeps our stockholders happy. As our Dean of Marketing says to incoming students, “It’s not your (de)fault, it’s society’s.”

And while we have the floor, so to speak, we at MDU would like to take the opportunity to introduce our new Platinum Degree Leasing Program. For just $199 a month (no money down, $4999.99 due at commencemtn) you can list a Bachelor’s Degree in Consulting Policy Education and Administrators’ Ski Retreat Management on your c.v. for 60 months. MDU’s PDLP goes from zero to sixty job interviews in less than 4.6 weeks and has more applicant-screening wiggle room than any other leased degree in its class. This offer, however, does not apply to our Certified Previously Owned Degrees and may not be strictly legal in all states.

A couple of folks here should really sit down and calculate the amount of tax dollars going to support your local state university.

While doing this, look up the average salary for the professors there. Compare those numbers to the salaries at for-profits.

Then, go explore the amount of money used for capital and real expenditures. Again, compare to the for-profits.

Finally, obtain the salaries of your university president and staff and compare that to the salaries for campus presidents and staff at the for-profits.

I think you’ll be surprised to see who has the more efficient model…and who is REALLY wasting your tax dollars.

@ cigarcubano

Thank you for saying it. It is simple, for-profits are fake schools. Not real schools. Just scams to get taxpayer dollars and they hand out degrees and grades.

The only halfway good argument to be made is that many traditional non-profit schools are also bad in the same way. But most traditional schools are much better than that, only a minority are a problem. But I don’t know a single for-profit that is a quality school. Why? Because quality means turning down students, and flunking out students, and losing their tuition dollar. If the operator of a for-profit does that, he or she will get fired. They are all about money.

Remember, the U. of Phoenix was caught red-handed recruiting homeless, alcholic high school dropouts to come to take out government loans (our money!) to pay over to Phoenix for clases. What a whore institution. You can Google the Business Week article.

while there are many for profits that should be denied fderal funds (and thereby forced to close their doors) I don’t think you can paint the entire industry with one broad stroke. I know of several worth while for profits with low rates of default and high rates of retention. Certainly there are those that have been suckling on the government teet for the lions share of their profit( Pheonix with 3 billion of revenue in a year where 86 percent is in the form of federal aid leaps to mind) and they should be dealt with. but keep in mind that each of these institutions is being allowed to operate in their respective states by that states educational authority. If these programs are so bad where is the oversight of the state agency?

WOW!!!  A little data analysis and financial investigation reveals the “real problem.”  Paying people the outrageous amounts to do something they love is absurd.  Then when a bad hire is made we pay them the crazy contract we agreed to at the beginning of the debacle!!  IT IS A GAME!!!!!  That is all it is.  When I see that the head coach makes millions and he or she has multiple assistants at more outrageous salaries I understand the “mess the NCAA and College athletics is in.”

Move everything to Division III, give the student-athletes a work-study job and let them be real students and get an education!!!

Oh, I forgot that is what a post-secondary experience is supposed to be!!

We need the draft and service to our country to be required of every 18 year old.  Those of us who served and are serving have a better perspective on this and the value of an education.  WE should not be in the entertainment business as our #1 priority.  Get a life!!

Rage Against The Machine!!!  Bo

Of course the NCAA is concerned…Coaches and AD’s control the NCAA and they want every penny that they can squeeze out of the system. 

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