Wednesday, September 1, 2010

A less-well-publicized federal bailout

When you hear the words "federal bailout," most people think about big banks, big auto companies, AIG, or Fannie and Freddie.  Yet another debt crisis is brewing and it is not receiving any attention from the mainstream media: student loans at for-profit schools.  WSJ reports that candidates for associates degrees at for-profit schools are twice as likely to take out loans and their debt is nearly twice as high as candidates for these degrees at nonprofit and public schools.  Many for-profits receive more than 80% of their revenue from federal loans. 

The Department of Education is considering setting a minimal loan repayment rate for schools, perhaps around 45%.  Some big players could be in big trouble if this ends up being the rule; Capella has a repayment rate of 40%, Kaplan 28%, Strayer 25%, and Phoenix is right at 44%.  Of course we all know who is on the hook for the portion of the federal loans that the students do not repay. 

To their credit, the for-profits have developed a market by making higher education more accessible to the public at large with their decentralized campuses and online courses.  Established institutions of higher education could learn from the entrepreneurial approach of some of these schools.  NC State is currently exploring ways to make its MBA program more accessible. 

Regulation can play a useful role in this situation, especially rules that require full disclosure of data on graduation, student placement and loan repayment rates.  This would allow students to better decide for themselves what opportunities are best for them. 


  1. Frontline recently had a program called College, Inc. that talked about the some of the practices of for profit online universities.

    I've got mixed thoughts about the for profit online education. I've attended college courses in traditional university settings and also courses offered through a for profit online university.

    There big advantage of the for profit online university course was it was convenient. I did not find it as academically rigorous as the traditional university courses. Additionally the cost of the for profit university course was more than double the same course was through my local university.

    So for more than twice the price, I got a less valuable education experience from the online for profit university.

    In my experience traditional universities are more academically rigorous than online for profit universities.

    I own a small businesses with an employee. At this point I don't think I would hire someone who got their degree from an online for profit university.

  2. After reading Michael Lewis's book "The Big Short" I too realized that the for-profit universities were chomping away at the public trough. Based on some of the data brought out at the hearings looking into their practices, I was appalled. Not only is there a lot of evidence about the lack of good content and experiences in courses, the students pay double or more than they would pay in a state university; but there really are no other services like career placement and help. Student loan debt cannot be shaken off -- these students will be haunted by debt for years, if not the rest of their lives. These for-profit universities now receive a huge proportion of Pell grants. In many ways this looks like a machine to siphon off taxpayer funds, for extremely little value to the students, or to society. Harumph! Get's me mad.

  3. Every school is profit but some just hire more administration or build more facilities to zero it out.