For-profit schools step up lending
A new report finds that many for-profits make unaffordable loans to students to order to keep federal money flowing to the schools.
Many for-profit schools have begun making costly private student loans, knowing in many cases that more than half of those loans will never be repaid, a report (.pdf file) from the National Consumer Law Center finds.
Most of the schools started the institutional loan programs when third-party private student lenders began terminating their partnerships with for-profit schools following the credit crash.
The NCLC says the report shows the urgent need to regulate lending by for-profit schools and provide relief for vulnerable borrowers, many of whom attend for-profit schools that fail to deliver quality educations as promised.
The report said schools seem to view these "institutional loans" as loss leaders to keep the federal dollars flowing. Among other reasons, proprietary schools must show that at least 10% of revenues come from sources other than Department of Education federal student assistance.
Schools thus make unaffordable loans as a way of filling up the 10% category with "vapor" revenues derived from loans that will never be repaid, the report said. Post continues after video. (The second video is from December.)
"Institutional loan programs are aimed at attracting investors and keeping the federal aid pipeline flowing," said Deanne Loonin, director of NCLC's Student Loan Borrower Assistance Project and author of the report. But students are often harmed by such lending.
"Each failed loan represents an individual who cannot repay a debt and who may be facing aggressive collection tactics and damaged credit ratings," Loonin said. "Piling more debt on students already buried in federal and third-party private loans is hardly in the best interests of students even if it serves a company's bottom line."
The report was released as for-profit school executives and their lobbyists are fighting the Obama administration and congressional efforts to ensure that for-profit schools deliver quality outcomes in return for the growing amounts of federal aid going to the industry.
In the Senate, the Health, Education, Labor and Pensions Committee issued a report in December warning: "Serious questions have emerged about the share of the military educational benefit pool going to for-profit schools with questionable outcomes."
Committee Chairman Tom Harkin, D-Iowa, said that by extending benefits similar to the GI Bill to current veterans, "Congress may have unintentionally subjected this new generation of veterans to the worst excesses of the for-profit industry: manipulative and misleading marketing campaigns, educational programs far more expensive than comparable public or nonprofit programs, and a lack of needed services."
The for-profit colleges make big profits on federally guaranteed loans, but critics say that even students who graduate -- a small percentage -- aren't likely to snag the kind of high-paying positions they're led to expect.
The business has exploded over the last decade. They appeal to working adults seeking training that will help them advance their careers, veterans and active-duty military hoping to smooth the transition to civilian life and, in many cases, those who did poorly in high school and are unable to gain admittance to more selective universities.
The report reviews institutional lending at the largest for-profit higher education companies and a number of smaller companies as well. It highlights the main problems with institutional loans, including high default rates, high costs, predatory terms, and accounting tricks and traps.
The final sections discuss the various rationales for the schools' actions and recommendations for reform, including strengthening the "90-10" rule and stepped-up attention by federal and state regulators.
More from ConsumerAffairs.com and MSN Money:
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