A Silver Lining from the Credit Crunch
Blog Post
March 4, 2008
The Los Angeles Times recently provided a disturbing example of how some for-profit trade schools like Corinthian Colleges have been pushing subprime, high-risk students to assume heavy levels of debt that they may never be able to repay. In an article on the credit crunch, the LA Times quoted a 20 year old student, with a 10 month old baby, who is taking classes at Everest College in West Los Angeles to become a medical assistant. To pay for an eight week course at the Corinthian-owned school, this student has had to take out an $8,000 private loan with an 8 percent interest rate. The student, and several friends with similar loans, told the newspaper "that they knew that repayment would be difficult on the $9 an hour or so they expected to earn if they got jobs." The course, they said, gave them "75% to 90% of what they need to get and keep a job."
[slideshow] The students say the loans were worth taking because they gave them an opportunity to attend the school. But they probably won't be so happy when they go into repayment, particularly if those jobs don't materialize. They may be even more disappointed when they discover that they could have gotten the same training for a fraction of the cost at the nearby Pasadena City Colleges, which according to the LA Times, "charges $628 annually in tuition and fees to in-state residents."
If there is a silver lining to the credit crunch, it is that for-profit colleges and loan companies, like Sallie Mae, are being forced to think twice before pushing high-risk borrowers to take on expensive private loan debt that they have little hope of ever paying back.
Of course, this is not the story that the mainstream press is telling. Instead, they are focusing on the sensational story that student loan funds are drying up. That story, which is creating a panic, is misleading at best.
Despite the hysteria, we have not heard of a single case in which a student has been unable to obtain a federally guaranteed student loan as a result of the credit crunch. As we have said repeatedly, students are in absolutely no danger of losing access to federal Stafford loans.
As of now, the borrowers who mainly appear to be in danger of losing access to high-cost private student loans are those with poor credit records attending for-profit trade schools of dubious quality. (Note: we're not saying all trade schools are of dubious quality, but many are.)
Even within the for-profit higher education sector, the impact of the credit crunch has been limited so far. In recent weeks, some trade-school chains, such as Capella University, Devry Inc., Strayer College, and the University of Phoenix, have gone out of their way to assure nervous investors that the credit crunch has had little to no impact on students attending their institutions. "We are really not seeing any impact on our business," Stephen Shank, Capella's chief executive officer, recently told The New York Times.
The companies that are feeling the pinch are those that have aggressively steered financially-needy students to take out high-interest private loans, such as Career Education Corporation, Corinthian Colleges, and ITT Educational Services Inc. According to company disclosures, private loans make up 30 percent of the revenue at ITT, 18 percent at Career Education, and 13 percent at Corinthian. Corinthian has revealed that 75 percent of its private loans go to subprime borrowers.
In contrast, private loans make up just about 4 percent of the revenue of Apollo Group, which is the parent corporation of the University of Phoenix, 3 percent at Strayer, and 1 percent at Capella. A recent report from Investor's Business Daily reveals that only one quarter of one percent of private loans at Strayer go to subprime borrowers.
Of course, some advocates for trade schools argue that cutting off private loans to subprime borrowers attending these institutions will lead to a severe access crisis. But their argument fails to recognize just how dangerous it is to rely on private loans as a college access tool. Because private loan providers price their loans based on students' credit scores, those with the greatest financial need are almost guaranteed to get loans with the highest interest rates, the highest up front fees, and worst conditions. These lenders have proved to be notoriously unwilling to help struggling borrowers find ways to make repayment easier. And the government has made it extremely difficult for borrowers in dire straits to discharge their private loans in bankruptcy.
Our colleague, Erin Dillon at Education Sector, wrote yesterday that pushing a high-interest private loan on "a student with a low chance of graduating or getting a job is more a recipe for life-long indebtedness and a destroyed credit history than it is an educational opportunity."
Erin is right. As a country, we are doing no favors to the most financially needy students by pushing them to take on such expensive debt to attend schools of dubious quality. Perhaps the credit crunch will force policy makers to realize that.