These proposals are a good start, but more steps will be needed
The good news is that the Obama administration seems more inclined than its predecessor to stand up against the abuses of proprietary schools. In May, the Department of Education revealed that it was considering reversing changes the Bush administration made to weaken the incentive-compensation ban. It is also thinking about adding teeth to the rules requiring proprietary colleges to show that graduates are finding gainful employment in their field and cracking down on schools that willfully mislead prospective students. Our overall goal at the Department of Education in post-secondary education is to make sure that students … have the information they need to make good choices, Robert Shireman, the deputy undersecretary of education, told financial analysts and investors during a conference call earlier this year.
For starters, the Department of Education should publish the data that it already collects on the number of students at each school who default over the lifetime of their loans. At the moment, it only releases the number who default during the first two years after leaving college, which is of limited value, not only because this is such a short time span, but also because the rates can be easily manipulated by schools.
As a result, her loan balance has ballooned to approximately $32,000, and she has no idea how she will ever pay it off*
Just publishing lifetime default rates would give prospective students a clearer picture of the risks of enrolling in a particular school. But the impact would be far greater if Congress used this data, along with graduation rates, to weed out abusive institutions; ideally, any school that failed to meet a certain threshold should be kicked out of the federal financial aid programs.
At the same time, Congress should require companies that offer private student loans to give the same kinds of flexible repayment options and consumer protections as are available through the federal student loan program, including allowing borrowers to repay their loans as a percentage of their income.
These changes would go a long way toward helping people like Martine Leveque escape their mountains of debt and ensuring that future students don’t wind up in the same situation. It would also guarantee that taxpayers don’t go on bankrolling giant companies that profit by exploiting those who are struggling to build better lives.
Since graduating in 2008, Leveque has been unable to find a nursing job, perhaps because she never learned how to perform basic tasks such as giving shots. Instead, she works as an occasional home health care aid earning at the most $1,200 a month-not enough to pay her rent on the cramped apartment she shares with her sister and son or keep gas in her car, much less pay off her student loans. My credit is ruined, Leveque says. I made one mistake, and I will be paying for it for the rest of my life.
Key lawmakers considered kicking all trade schools out of the federal student aid programs-a virtual death sentence given the institutions’ heavy reliance on these funds. But Congress ultimately stepped back from the brink and instead strengthened the Department of Education’s authority to weed out problem institutions. Under the new rules, for-profit colleges had to get at least 15 percent of their tuition money from sources other than federal loans and financial aid. Also, if more than a quarter of a school’s students consistently defaulted on their loans within two years of graduating or dropping out, the school could be barred from participating in federal financial aid programs. The idea was to get rid of those schools that were set up solely to feed on federal funds and didn’t provide the meaningful training students needed to get jobs and pay off their debt. As a result, during the 1990s more than 1,500 proprietary schools were either kicked out of the government’s financial aid programs altogether or withdrew voluntarily. In an effort to rein in abusive recruiting tactics, in 1992 Congress also barred schools from compensating recruiters based on the number of students they brought in.
Sallie Mae clearly understood that these private loans were going mostly to subprime borrowers who might not be able to pay them back; in 2007, Senate investigators uncovered internal company documents showing that executives expected a staggering 70 percent of its private student loans at one for-profit school to end in default. Investigators concluded that Sallie Mae viewed these loans as a marketing expense-a token sum to be paid in exchange for the chance to gorge on federal funds.
Lawmakers also need to revisit changes Congress made to the bankruptcy code in 2005, which make it exceeding difficult for financially distressed borrowers, including those with private student loans, to discharge their debt in bankruptcy
Theresa Sweet, a thirty-three-year-old California resident, took out about $100,000 in private loans between 2003 and 2006 to study photography at the Brooks Institute in Santa Barbara, which is owned by the Career Education Corporation. At the time, she says the Brooks recruiters-who have frequently been accused of misleading students-told her that graduates of their photography program typically made at least $60,000 straight out of school. In fact, since graduating three years ago she has been unable to find paid work in her field, and, while she has managed to get forbearances on her student loans, the interest has continued to stack up. She now owes more than $200,000.
Meanwhile, as the credit crunch eases, traditional lenders may well go back to making private loans to proprietary school students, especially given the changes afoot in the industry. President Obama aims to get rid of the program that allows lending companies to collect lucrative fees and interest for serving as the middleman on federal student loans and instead have the government offer the loans directly. Once forced out of the federal student loan program, traditional lenders will have a powerful incentive to seek profits by wading deeper into the private student loan market, and for-profit schools, with their exponential growth, could once again be an appealing target.