Brain-Injured Marines and For-Profit Colleges

Military personnel have long been targets of predatory creditors, going back to the moneylenders who followed the Roman legions. More recently, payday lenders clustered storefronts around military bases. The latest development is that subprime operators are hawking degrees at for-profit colleges to former and current service members.

Holly Petraeus, who heads up service member affairs in the federal Consumer Financial Protection Bureau, has a powerful account in an op ed for the NY Times of the targeting of current and former military personnel by for-profit colleges, including some seriously brain-injured Marines at Camp Lejeune, N.C. Appointing Petraeus, whose husband David is CIA director and former commander of American forces in Iraq and Afganistan, to this post was a stroke of genius. When general consumer protection arguments fail to get much traction, finding some military victims seems to help get the message across.

Because service members get federal education benefits that aren’t under the Higher Education Act, these benefits don’t count toward the 90 percent cap on HEA federal aid as a source of for-profit college revenue. By enrolling 10 percent military-funded students, schools can go up to 100 percent federal funding. (To evade the cap, they also use the strategy of raising tuition and tacking on some private student loans to the federal grant and loan aid.)

Recruiting students who can’t benefit is nothing new with for-profit colleges. Their recruiters previously have targeted mentally-ill residents of homeless shelters, to say nothing of just ordinary folks without the basic skills for college-level work. Furthermore, these degree programs often have poor placement records.

The U.S. Department of Education recently released national student loan default rates, and not surprisingly, they are up. See here. For-profit institutions showed the biggest increase in defaults. The two-year “cohort default rate” for the for-profit sector went up from 11.6 to 15 percent from FY 2008 to FY2009 (compared to increases of 6.0 to 7.2 for public institutions and 4.0 to 4.6 for nonprofits).

These figures are appalling for all sectors, particularly once you realize how understated the default figures are. The default numbers are most useful to show trend lines, as opposed to showing how many former students are actually struggling with their student loans. The trend is toward a lot of debt trouble for students who gambled on the American dream of a college education and lost.

The reported cohort default rates greatly understate loans in distress, because a loan is not considered in default until it is delinquent for 360 days. Delinquencies don’t include those who get some forebearance. Furthermore, the report on the FY 2009 cohort default rate refers to loans that came due between Oct. 1, 2008, and Sept. 30, 2009, and that went into default before Sept. 30, 2010. It does not count defaults after Sept. 30, 2010. Thus, this default rate is just for the first year or two of the loan term. Defaults over the longer term are likely to be much higher, perhaps by a factor of four or five.

For-profit schools enroll about 11 percent of undergraduates, yet they account for just under half of defaults in the first two years after payments come due. A recent studyfound that for every student who actually defaults on student loans, another two or more don’t make payments on time.

Another important part of the picture is that students at for-profit schools use a lot more federal grant aid than those at other schools. Seventy-five percent or more of the students at these schools have federal grant aid, and that aid is not leading to good jobs for most of them. For-profits supposedly have a mission of preparing students for careers, yet they are failing at a very high rate to achieve it while spending a lot of federal money in the process.

Petraeus highlights aggressive and deceptive recruiting practices among former and current service members. Her account comes on the heels of Joe Nocera’s unsuccessful attempt to defend these colleges in an articlefor the New York Times Magazine.

Nocera acknowledges the boiler room tactics used to recruit anyone with a heartbeat into for-profit schools and the very high default rates that inevitably result. Yet he invokes emotional appeals for college as part of the American dream. He also claims the profit motive is a way to promote educational efficiency. The talk of the American dream should remind us of the subprime mortgage boom; not everyone should own a home and not everyone should go to college, particularly a for-profit college charging on average $14,000 in tuition and fees per year for poor odds of a good job. Furthermore, the efficiency of for-profits is in their ability to suck up federal funds, not in improving outcomes for students.

Let’s not forget that these are not true private sector entities. If the “private”for-profits could make money from paying customers, more power to them. But that’s not their business model. These schools get most of their money from the federal government, making them effectively government-sponsored entities. Their bailout is pre-packaged. For-profit schools are paid in advance, even though students fail later.

As a defense of the for-profit sector, Nocera notes that public sector colleges’ budgets are being cut as a result of dwindling revenues of states and municipalities in the continuing bad economy. He uses that as a reason to promote for-profit colleges based on federal funding. But why not instead redirect the federal money to public community colleges and universities? Outsourcing of higher education by the federal government to for-profit enterprises has already proved a failure. As things stand, community colleges often get students after they fail at for-profit schools, and it is harder to get these students on a sound course when they are mired in nondischargeable debt.

Nocera makes other arguments that don’t withstand scrutiny. For-profit schools hold classes nights and weekends and don’t fund faculty research, he says; but the same is true of community colleges and other access-oriented public institutions.

Realpolitik may be the best reason to accept the current situation with for-profits schools, because they have intense political backing, particularly but not exclusively from House Republicans. So if these institutions are not going away, can they be effectively regulated? The Department of Education has promulgated “gainful employment” rules that are weak but these have provoked a legal challenge from the industry and protests from congressmen.

Ultimately, Nocera argues for tolerating for-profits but regulating them better. Some ideas that have been floated include: a national entrance examination to determine ability to benefit from college, and some sort of skin-in-the game requirement for the schools. The latter could be structured as a give-back of federal funds, both grants and loans, when outcomes are poor. Perhaps even better, money could be withheld from the colleges at the front end and only paid later when students succeed. Neither sort of regulation would be easy to design or administer. Furthermore, the same political rent-seeking that protects the schools’ existence would also kick in to block effective regulation.

The focus of Holly Petraeus on predation of the military by for-profit colleges is a good reminder that these institutions have demonstrated over and over that they will stoop to anything that is legal. As a result, regulation is very expensive and always one step behind the sleazy new evasions developed by the industry.

We’ve been here before. For-profit trade schools were finally shut down in the 1990s based on their poor results. Then a new industry sprang up in its place, one focused on production of conventional college degrees. That hasn’t turned out any better.

Comments

[Russ]

The problem is student loans are not underwritten based on likelihood that the student could actually get a career that would allow them to pay back the loans. As long as student loan credit is so easy to obtain, this problem will persist.

Students loans are the next subprime bubble to pop. Education costs are out of whack because there is no incentive for schools to control costs. Easy credit increases the cost of schooling just like easy credit increased the cost of housing. There is no justifiable reason it costs upward of $50k/yr to attend college.

There are probably only 50 schools/universities in this country that are worth taking substantial debt to attend. It is one thing to be $75k or more in debt to attend MIT for engineering versus getting a Geography degree from ACME U.

[Richard Davet]

The "GSE Business Model", fatally flawed, at work in higher education.

[Mike Dillon]

Imagine my surprise when I received a return phone call from Mrs. Patreaus, personally, several months ago. After an enlightening half hour phone call discussing civilian and military foreclosure issues, I can only hope that she and the rest of the CFPB end up with all of the necessary tools to protect both consumers and military personnel alike. Dog knows the effort is minimal at the federal level at the moment...

Thanks for this story, Professor. TBI issues, in general, can never receive enough exposure. They are very commonly overlooked and dismissed out of hand.

[SFJD]

Student loans may well prove to be the next bubble to burst.

A well-educated but underemployed generation of young adults was a major source of the frustration that sparked the revolutions in Tunisia and Egypt. While the situation here isn't as bad, a generation of unemployable, debt-saddled college grads doesn't sound like a recipe for anything good.