Bernie Sanders and Student Loan Debtors: If you are ovewhelmed by college-loan debt, Bernie is your only hope

Help me, Obi Wan Kenobi. You're my only hope.

Princess Leia

Star Wars

Bernie Sanders beat Hillary Clinton in Michigan--stunning everybody, including Bernie.

Bill O'Reilly scoffed, and pundits dismissed Bernie's victory as a blip; but change is in the wind. Bernie has the support of young people, and Hillary will never win them away. They are attracted to Bernie's clarity and straightforward message.

In particular, Bernie's call for a free college education at a state college is very appealing. And--as I've written before--his free college plan is not wacky. It would actually be cheaper than the cumbersome student aid program we now have in place..

Now I encourage Bernie to reach out specifically to overburdened student-loan debtors--and there are 20 million of them.  If he will make four simple promises to this weary and oppressed multitude, I think he will win over millions of voters to the Bernie Crusade.

And these are the promises:

1) If I am elected President, the federal government will stop garnishing Social Security checks of elderly student-loan defaulters.

2) If I am elected President, I will forbid the government and its debt collectors from slapping unreasonable fees and penalties on student-loan balances.

3) If I become president, student borrowers who complete long-term income-based repayment programs will not be taxed on any forgiven student-loan debt (a policy recommended by President Obama).

4) If I become your President, I will draft regulations forbidding for-profit colleges from requiring students to sign arbitration agreements that cut of their right to sue their college for fraud.

None of these promises are radical, and none are expensive. And in fact, if all four of these promises were fulfilled by the next President, the impact on student-loan debtors would be minimal.

But these promises would be a signal to oppressed student-loan borrowers that Bernie understands their suffering and will do what he can to give them some relief.

But whether or not Bernie makes these particular promises, he has my unwavering support right through the election process. Of all the candidates vying for the Presidency, Bernie is the only one who will do something substantive to address the student-loan crisis.  Indeed, as Princess Leia might have put it, Bernie is our only hope.

Help me, Obi Wan Ka-Bernie. You're my only hope.

Rising Student-Loan Default Rates and Ridiculously High Tuition Costs: The Big Short

We live in an era of fraud in America. Not just in banking, but in government, education, religion, food, even baseball... What bothers me isn't that fraud is not nice. Or that fraud is mean. For fifteen thousand years, fraud and short sighted thinking have never, ever worked. Not once. Eventually you get caught, things go south. When the hell did we forget all that? I thought we were better than this, I really did

Mark Baum (played by Steve Carell)

The Big Short 

The Big Short, the Academy-Award winning movie on the home-mortgage crisis of 2008, shows movie goers how greedy banking institutions created a housing bubble that burst in a shower of home foreclosures and trillions of dollars in financial losses.

A similar bubble has emerged in the federal student-loan program. And although the housing bubble is more complicated than the student-loan bubble, there are some eerie similarities between the collapse of the housing market a few years ago and the student-loan crisis. For example:

Hiding risk. The Big Short includes a scene in which  Mark Baum, a skeptical investment banker played by Steve Carell, quizzes a representative of one the bond rating agencies--Moody's or Standard & Poor. The rating-agency representative admits that  the agency gives mortgage-backed securities  the highest rating--AAA--even  though the agency knows that many of the instruments are packed with risky home mortgages that are headed for foreclosure.

Something similar is happening in the federal student-loan program. Although the Department of Education recently announced that student-loan default rates went down last year--especially in the for-profit sector, that's not really true.  The for-profits have been aggressively signing up their former students in economic-hardship deferment programs that excuse borrowers from making loan payments without being counted as defaulters.

When we look at the five-year default rates in the for-profit sector, the numbers are scary. Almost half the people who took out student loans to attend a for-profit institution default within 5 years of beginning the repayment phase on their loans. And two years after beginning the repayment phase, 3 out of 4 of these students are seeing their loan balances go up--not down--due to accruing interest that is not being paid down.

In short, about half the people who take out student loans to attend for-profit colleges don't pay back their loans. Clearly, this sector of the student-loan program is a train wreck.

Unsustainable rising costs.  As many people still remember, the cost of housing went up rapidly during the early 2000s, with people buying homes and flipping them for huge profits over a matter of months or even weeks. Everybody was making money in real estate--until the housing market collapsed.

Similarly, America has seen college tuition costs rise faster than the inflation rate for many years. The cost of attending law school, obtaining an MBA, or studying at an elite private college has gone through the roof.  I graduated from University of Texas Law School in 1980 and only paid $1,000 a year in tuition. If I enrolled at UT Law School today, it would cost me 36 times as much--$36,000 a year for Texas residents!

Of course, these tuition hikes can't be justified any more than the dizzying cost of a split-level home in Coral Gables, Florida in 2005.  And of course, those costs must eventually come down.  Already, law school enrollments have plummeted and the schools have lowered admissions standards to attract students.  And the elite private colleges are now giving huge discounts on their posted tuition rates; the average freshman now pays about half the college's sticker price.

Hidden costs and fees. Finally, the home mortgage bubble was fueled by greed and fraud. The bankers who packaged mortgage-backed securities were not taking any risks--they took their fees from the transaction costs.  The banking industry was selling toxic financial instruments to gullible investors, including pension funds and people invested in mutual funds.

Similarly, the college industry is charging a gullible public more than a liberal arts degree is worth, and the suckers enroll because, hey, going to Barnard or Brown or Amherst must be a good investment. And the colleges aren't assuming any risks. Their pliant students are borrowing from the federal student loan program, and the government guarantees the loan. Ivy League U doesn't care if its graduates default on their loans any more than Goldman Sachs cared what happened to the investors who bought their mortgage-backed securities.

And the fees! People who default on their loans get assessed huge collection fees and penalties. People are routinely going into the bankruptcy courts trying to discharge student-loan debt that is two or even three times the amount they borrowed due to accrued interest, penalties, and fees.

So if you haven't seen the Big Short, go see it. And as you watch this riveting drama, think about the student-loan program. A bubble is about to burst at a college near you.

"I thought we were better than this."

Student Loan Debtors and the Presidential Race: Hillary still has an opportunity to win over young voteers

Hillary Clinton devastated Bernie Sanders in the South Carolina Democratic Primary election. As Bernie candidly admitted, the Sanders team was "decimated." The only good news, he said, was this: Bernie beat Hillary among voters age 29 and younger.

Hillary talks herself hoarse telling voters how much she has done for them and much more she will do if she is elected President. But young people don't buy it. Essentially, they see her as an elderly political hack who sucks up to the banks.

But Hillary can still make headway with young voters if she would only promise some tangible and substantive reforms to the student-loan program. After all, there are 43 million Americans with outstanding student-loan debt; and most of them are young.

What could she promise? How about this:

1) "If elected president, I will instruct the IRS to draft regulations specifying that forgiven student-loan debt is not taxable."  

Under current law, about 4 million people are in income-based repayment plans, and most of them are seeing their total debt grow larger with each passing month due to accruing interest. When they complete their long-term repayment plans (after 20 or 25 years), their loan balances will be forgiven, but the forgiven amount will considered taxable income by the IRS. This is a real problem for people in income-based repayment plans. Why not just fix that problem with an IRS regulation?

2) "If elected president, my Department of Education will enact regulations that will cut off federal funding to any for-profit college that forces students to sign a promise not to sue the college for fraud or misrepresentation. And I will instruct the Department of Justice to cooperate with State Attorney Generals who are investigating and suing for-profit colleges that exploit students."

This promise demonstrates nothing more than common decency and would be well received by young people.

3) "When I am your president, the government will stop garnishing Social Security checks of elderly student-loan defaulters. And my administration will not oppose bankruptcy relief for elderly student-loan defaulters who are living below the poverty level."

There is nothing radical about this proposition. In fact, last month, in Precht v. U.S. Department of Education, DOE agreed to bankruptcy discharge of an elderly person's student-loan debt and stopped garnishing his Social Security check.

4) "My administration will renegotiate all contracts with student-loan debt collectors like Educational Credit Management Corporation. All these entities will be required to disclose the salaries of their executives and employees. They will also be required to disclose their profits. And I will eliminate the penalties and fees that the collection agencies have been charging distressed student-loan borrowers."

The beauty of these promises is this. All the reforms I listed could be implemented by President Hillary Clinton on the day she takes office. None of them require congressional approval.  And even if they did require statutory changes, what federal legislator would say no to these modest reforms if President Hillary asked for them?

If Hillary made these promises, she would demonstrate that she understands the magnitude of the student-loan crisis and that she  plans to take energetic action to grant some relief.  But my prediction is this: Hillary won't promise any substantive reforms of the student loan program because Goldman Sachs and the banks would disapprove. And that--in a nutshell--is why young people are not voting for Hillary.

References

Natalie Kitroeff. Loan Monitor is Accused of Ruthless Tactics on Student Debt. New York Times, January 1. 2014. Accessible at http://www.nytimes.com/2014/01/02/us/loan-monitor-is-accused-of-ruthless-tactics-on-student-debt.html?_r=0

Stephen Burd. Signing Away Rights. Inside Higher Ed, December 17, 2013. Available at https://www.insidehighered.com/views/2013/12/17/essay-questions-mandatory-arbitration-clauses-students-profit-higher-education

Ashley A. Smith. U.S. Urged to Deny Aid to For-Profits That Force Arbitration. Inside Higher Ed, February 24, 2016. Available at: https://www.insidehighered.com/quicktakes/2016/02/24/us-urged-deny-aid-profits-force-arbitration?utm_source=Inside+Higher+Ed&utm_campaign=183bc9e3a3-DNU20160224&utm_medium=email&utm_term=0_1fcbc04421-183bc9e3a3-198565653

Loan forgiveness for college students defrauded by for-profit colleges: Why not simply allow defrauded students to take bankruptcy?

The Department of Education is revising the regulations for handling student-debtor requests for debt relief. Under present regulations, student-loan borrowers  are eligible for debt relief if they can show they were victims of misrepresentation by the institution they attended.

But the old regulations are cumbersome, and DOE has been swamped by debt relief requests after Corinthian Colleges closed last year. Corinthian had 350,000 students or former students.

Apparently, the Department of Education is proposing some sort of hearing process where students who claims to be fraud victim can confront the colleges that lured them into enrolling and taking out student loans.

But how will that work? All the for-profit colleges have teams of lawyers, and the defrauded students who confront them at hearings will likely  have no lawyer at all.  That's a crumby idea.

Second, DOE is contemplating some kind of statute of limitation that would bar a student's fraud claim if not filed by some yet-to-be-defined time limit. Another crumby idea. Student-loan creditors can pursue student-loan defaulters any time they want--30 years after a loan was incurred if they choose. That's because there is no statute of limitation on debt collection of a student loan. So why should students be restricted by a time limit to file misrepresentation claims?

Third, the proposed regulations are cumbersome legalese that many students won't understand. Here is a sample of proposal's text:

For loans first disbursed prior to July 1, 2007, the borrower may assert as a defense to repayment, any act or omission of the school attended by the student that relates to the making of the loan or the provision of educational services that would give rise to a cause of action against the school under applicable State law.

Got that?

If the Department of Education were willing to face facts, it would admit that millions of students who enrolled at for-profit colleges have valid misrepresentation claims.  The for-profit industry as a whole has a 5-year default rate of 47 percent--strong evidence that many of the programs the colleges offered did not lead to well-paying jobs.

Rather than construct an elaborate, expensive, and unworkable administrative process for sorting out student fraud claims, the Department of Education should simply allow all students who attended a for-profit college and who are now broke to discharge their student-loan debts in bankruptcy without having to meet the "undue hardship" standard that currently applies to student-loan debtors in the bankruptcy courts. In other words, an insolvent student-loan debtor who attended a for-profit college should be able to discharge student-loan debt in bankruptcy like any other nonsecured debt.

After all, the bankruptcy courts have the expertise and the resources to sort out valid bankruptcy claims from invalid ones.  But DOE won't expedite the loan forgiveness process because it knows that millions of people took out student loans for worthless college experiences. If every student who was huckstered by a for-profit college obtained student-loan debt relief, the cost of loan forgiveness would amount to hundreds of billions of dollars.

References

Michael Stratford. Obama Crackdown on College Fraud. Inside Higher Ed, February 9, 2016. https://www.insidehighered.com/news/2016/02/09/education-department-creates-new-office-crack-down-fraud-colleges?utm_source=Inside+Higher+Ed&utm_campaign=8bca58981a-DNU20160209&utm_medium=email&utm_term=0_1fcbc04421-8bca58981a-198565653

Michael Stratford. New Criteria For Debt Relief. Inside Higher Ed, February 17, 2016. Available at: https://www.insidehighered.com/news/2016/02/17/us-plan-would-cancel-federal-loans-borrowers-misled-their-colleges?utm_source=Inside+Higher+Ed&utm_campaign=60a80c3a41-DNU20160217&utm_medium=email&utm_term=0_1fcbc04421-60a80c3a41-198565653

Kelly Field, "U.S. Has Forgiven Loans of More Than 3,000 Ex-Corinthian Students, Chronicle of Higher Education, September 3, 2015. Accessible at: http://chronicle.com/article/US-Has-Forgiven-Loans-of/232855/?cid=pm&utm_source=pm&utm_medium=en

Tamar Lewin, "Government to Forgive Student Loans at Corinthian Colleges," New York Times, June 8, 2015. Accessible at: http://www.nytimes.com/2015/06/09/education/us-to-forgive-federal-loans-of-corinthian-college-students.html?_r=0

Adam Looney & Constantine Yannelis, A crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising default rates. Washington, DC: Brookings Institution (2015). Accessible at: http://www.brookings.edu/about/projects/bpea/papers/2015/looney-yannelis-student-loan-defaults

Arbitration and For-Profit Colleges: Public Citizen, a consumer group, asks the Department of Education to bar for-profits from forcing students to arbitrate their fraud claims. What a good idea!

Public Citizen, a consumer rights group, formally petitioned the U.S. Department of Education to cut off federal student-aid money to for-profit colleges that force their students to sign arbitration agreements that bar students from suing the colleges for fraud or misrepresentation or from filing class-action lawsuits. Julie Murray, spokesperson for the group, explained Public Citizen's position. "Taxpayers should not have to subsidize predatory schools that deny their students a day in court," Murray said in a press release.

What a good idea! Everyone knows that thousands of low-income and minority students have been lured into enrolling at expensive for-profit colleges by misrepresentations and high-pressure recruiting tactics.  The for-profits have very high student-loan default rates, high dropout rates, and high percentages of students who are seeing their loan debt growing larger because they are forced into economic-hardship deferment programs due to the fact that their post-studies income is not high enough to pay off their student loans.

In fact, as Stephen Burd pointed out in an Inside Higher Ed essay, a for-profit institution's shareholders can sue a for-profit college for misrepresenting job-placement figures while the students themselves cannot.

Arbitration clauses always favor the for-profit industry because the for-profits pick the arbitration company, which gives the arbitrators an incentive to rule in favor of the colleges or at least to go easy on them in order to get "repeat business."  Discovery is often limited in arbitration proceedings, and arbitration can be expensive, since the student must bear part of the arbitrator's cost.

I agree with Mr. Burd, who wrote:

Congress should eliminate this injustice by barring colleges that participate in the federal student aid program from including binding arbitration clauses in enrollment agreements, just as Senators Tom Harkin of Iowa and Al Franken of Minnesota proposed . . . . As [the senators] wrote, "Colleges and universities should not be able to insulate themselves from liability by forcing students to preemptively give up their right to be protected by our nation's laws.

Student-loan debtors--and there are 42 million of you--should ask presidential candidates if they are willing to cut off federal student-aid funding to for-profit colleges that force their students to sign arbitration agreements.   What would Hillary's answer be? Donald Trump's? Bernie Sanders?

References

Stephen Burd. Signing Away Rights. Inside Higher Ed, December 17, 2013. Available at https://www.insidehighered.com/views/2013/12/17/essay-questions-mandatory-arbitration-clauses-students-profit-higher-education

Ashley A. Smith. U.S. Urged to Deny Aid to For-Profits That Force Arbitration. Inside Higher Ed, February 24, 2016. Available at: https://www.insidehighered.com/quicktakes/2016/02/24/us-urged-deny-aid-profits-force-arbitration?utm_source=Inside+Higher+Ed&utm_campaign=183bc9e3a3-DNU20160224&utm_medium=email&utm_term=0_1fcbc04421-183bc9e3a3-198565653

The percentage of low-income students going to college went down while Pell Grant spending went up: What's going on?

According to the American Council on Education, the percentage of low-income students enrolling in college has gone down. What's going on?

ACE reports that the percentage of recently-graduated low-income students who enrolled in college dropped from 55.9% in 2008 to 45.5% in 2013.  College enrollments also dropped for other income groups, but not by nearly as much.

Can the drop be attributed to insufficient federal student aid? Probably not. The Department of Education reported that federal student aid increased by 29% from 2009 to 2012--rising from $129 billion in FY 2009 to $166.9 billion in FY 2012.

And Pell Grant funding (grants to low-income college students) actually tripled from 2007 to 2011, going from $13.6 billion in FY 2007 to  $41.6 billion.

Perceived cost of higher education. ACE speculated that the perceived cost of higher education may have discourage low-income students from going to college, and this makes sense. Low-income young people may not be aware that many private colleges actually discount their tuition by more than 40 percent for incoming freshmen. In other words, potential students from poor families may not know that the sticker price is only the sucker price and that most first-year students get the benefit of deep discounts.

Going to work rather than going to college. ACE suggested another explanation for the percentage drop in low-income college students: many low-income students are simply skipping the college experience and going to work. This explanation also makes senses.

In my own family, I have a nephew who dropped out of college and got a job as a pipe fitter working in the shipbuilding industry. He's making good money and he found a girl friend who is also making good money as a pipe fitter. In fact, my nephew is making more money in his present job than he would make if he got a college degree and got a job as a school teacher. Is he likely to go back to college? I don't think so.

Low-income families have gotten wise to the for-profit college industry. I think there is a third possible explanation for the drop in low-income students going to college: low-income families may have gotten wise to the for-profit college industry.

All over the country, state attorney generals are investigating the for-profit colleges based on allegations that these colleges have engaged in misrepresentations and fraud.  Some for-profits have been fined. Corinthian Colleges filed for bankruptcy and several for-profits have closed.

It could be that low-income and minority students--who have been the target of the for-profit colleges--have figured out that many of these joints charge too much and don't deliver on their promises.

Conclusion

Low-income individuals are going to college in smaller numbers, and this may not be bad. If they can get good jobs without going to college then they can avoid the huge opportunity costs of being a college student--forgone wages and student loans.

And if young people from low-income families are becoming more appreciative of the risk of borrowing money to attend a for-profit college, that is certainly good news. Although the Obama administration hasn't been as aggressive as I think it should be toward the for-profit college industry, it has taken some steps to rein in abuses.  And state officials have taken action against abusive for-profits colleges as well. This is good news.

References

American Council on Education. ACE Fact Sheet on Higher Education. Pell Grant Funding History (1976 to 2010). Accessible at: http://www.acenet.edu/news-room/Documents/FactSheet-Pell-Grant-Funding-History-1976-2010.pdf

Misty Baily. Attorney Generals Expand Probe into For Profit Colleges. Education News, January 14, 2014. Accessible at:  /www.educationnews.org/higher-education/attorney-generals-expand-probe-into-for-profit-colleges/#sthash.pKZVeW5V.dpuf

Kelly Field. Attorneys General Take Aim at For-Profit Colleges Institutional Loan Programs, Chronicle of Higher Education, March 20, 2012. Accessible at: http://chronicle.com/article/Attorneys-General-Take-Aim-at/131254/

Scott Jaschik. The Missing Low Income Students: Study finds drop in percentage of low-income students enrolling in college. Inside Higher Education, November 25, 2015. Accessible at: https://www.insidehighered.com/news/2015/11/25/study-finds-drop-percentage-low-income-students-enrolling-college

U.S. Department of Education. Fiscal Year 2012 Budget Summary--February 14, 2011.  Accessible at: https://www2.ed.gov/about/overview/budget/budget12/summary/edlite-section2d.html

U.S. Department of Education. Pell Grant Funding Status. Accessible at:
http://www2.ed.gov/programs/fpg/funding.html

What was your first clue, Sherlock? A Chronicle of Higher Education writer explains that some colleges are gaming their student-loan default rates

Colleges must keep their student-loan default rates down or they will lose their right to participate in the federal student loan program. If a college's three-year default rate (as measured by the Department of Education) reaches 30 percent for three consecutive years, that college can be kicked out of the federal student loan program. And most colleges cannot survive without federal student-aid money.

Ben Miller, writing for Chronicle of Higher Education, explains how colleges can artificially keep their student-loan default rates down, hiding the fact that a lot of their students are not paying back their loans.  As Miller points out, DOE's student-loan default measure only calculates the percentage of defaulters who default within three years of beginning repayment--which is a very short window of time.

[B]ecause the measure tracks results for such a short time, it is possible for colleges to game the metric by artificially lowering the number of students who default within three years. How? A college can encourage borrowers to ask for a forbearance--an option in which the federal government allows borrowers to stop making payments without their loans becoming delinquent or heading toward default. Since it takes almost a year to default, the college needs borrowers to enter forbearance for a couple of years, ensuring they cannot show up in the default rate, even if they never make a single payment.

In fact, as Senator Harkin's Senate Committee documented in its report on the for-profit college industry, many for-profits aggressively encourage students to apply for economic hardship deferments, which are ridiculously easy to obtain.

That is probably why the three-year student-loan default rate for for-profits actually went down a bit according to DOE's 2014 student-loan default rate report. The for-profits are adept at getting their former students to sign up for economic hardship deferments that obscure the fact that these students are not making their loan payments.

Miller argued persuasively that a better measurement of student-loan defaults would be compare the number of students going into repayment at a college compared to the number of graduates.  Students who are going into repayment without graduating have lower rates of success than graduates in terms of getting good jobs, and they also have higher student-loan default rates.  Therefore, a college that has a high level of students beginning repayment compared to the number of graduates is probably a college that has a high student-loan default rate.

So what did Miller find?  Among public 4-year institutions, 84 students went into repayment for every 100 graduates.  But in the 4-year for-profit sector, 233 students went into repayment for every 100 graduates.  In other words, more than twice as many students attending 4-year for-profit institutions began repayment (in the most recent cohort of borrowers) than obtained degrees.

That is a very bad sign, and a strong indicator that the for-profits have much higher student-loan default rates than DOE's anemic metric shows.  It seems reasonable to conclude that the true student-loan default rate in the for-profit sector is at least twice as high as DOE reports; it is probably at least 40 percent!

The Obama administration surely knows that the number of students who default on their loans is much higher than DOE reports every year and that the true default rate for students who attended for-profit institutions is alarmingly high.

But so far at least, the for-profits have evaded effectively regulation; and they have hidden their true default rates by encouraging their former students to sign up for economic hardship deferments. Meanwhile they suck up about one quarter of all the federal student-aid money while only enrolling about 11 percen of all the post-secondary students.

Some day this house of cards will collapse, and the public will realize that the for-profit colleges have unacceptably high student-loan default rates. And we will have to face the fact that millions of people --mostly low-income and minority students--have defaulted on their loans and have had their lives wrecked by the fact that they attended for-profit institutions.

References

Ben Miller. Student-Loan Default Rates Are Easily Gamed. Here's a Better Measure. Chronicle of Higher Education, March 26, 2015.

Senator Tom Harkin is Like a Shade-Tree Mechanic--He Can Tell You What's Wrong With the Student Loan Program, But He Can't Fix It: Veterans, The New GI Bill and the For-Profit Colleges

Photo credit: autoguide.com

Senator Tom Harkin reminds me of the shade-tree mechanics I patronized when I was young and poor and drove old cars,  I would drive my junker up to some Mom-and-Pop mechanic shop, the mechanic would accurately diagnose what was wrong with my car, and then he would say he couldn't fix it.

Senator Harkin did the public a major service when he chaired the committee that reported on the for-profit colleges a couple of years. In a massive report--over a thousand pages when the appendices are included, the Harkin committee spelled out the many abuses in the for-profit college industry.

Since that report was issued, almost nothing has been done to rein in the rapacious for-profit colleges, which suck up about a quarter of all federal student aid money and only enroll about 11 percent of the students.

Last July, Senator Harkinn's Senate Committee has issued a second important report. This one focuses on the way the for--profits have made out like bandits with programs targeted at veterans who have gone to college under the Post-9/11 GI Bill.

Here is a summary of the Harkin Report's findings:

• Eight of the 10 top recipients of Post-9/11 GI Bill benefits are large, publicly traded companies that operate for-profit colleges. These eight companies received 23 percent of all the Post-9/11 GI bill money for 2012-2013.

• Seven of those 8 companies are currently under investigation by state attorney generals offices or the federal government for deceptive or misleading recruiting or possible violations of federal law. 

• The number of veterans attending public colleges has declined between 2009 and 2013 while the number of veterans who attend for-profit colleges has increased.

• Although overall enrollment at the eight top for-profit beneficiaries of the Post-9/11 GI Bill has declined in recent years , the number of veterans who enrolled at these schools has increased.

Why are veterans so attractive to the for-profit colleges? As the Harkin Report explains, the Higher Education Act requires that the for-profits operate under the 90/10 rule. In other words, they can only receive 90 percent of their revenue from federal student aid money.  However, money received under the Post-9/11 GI Bill is not counted as part of the 90 percent.

Thus, for-profits who are getting 90 percent or close to 90 percent of their revenue from the general federal student-aid program can get that last ten percent of their by enrolling veterans under the Post-9/11 GI Bill.

This would be fine, I suppose, if the for-profits were doing a bang-up job of educating veterans and preparing them for good post-military jobs. But apparently, they are not. 

The Harkin Report found that "[a]t the for-profit colleges currently receiving the most benefits, up to 66 percent of students withdrew without a degree or diploma" (p. ii).  The Report also found:

Between 39 and 57 percent of the programs offered by four of the companies receiving he most Post-9/11 GI bill benefits would fail to meet the proposed gainful employment rule, suggesting that the students who attend these institutions do not earn enough to pay back the debt they take on.  (p. ii)

As the Harkin Report put it, some for-profit colleges "appear to be taking advantage of a loophole to use Post-9/11 GI Bill funds to comply with the federal requirement that no more than 90 percent of revenue come from federal student aid" (p. ii).

And of course, this cozy arrangement for the for-profits is costing taxpayers, "who are paying twice as much on average to send a veteran to a for-profit college for a year compared to the cost at a public college or university ($7,972 versus $3,914)" (p. ii).

The Harkin Committee Report makes interesting reading, but the Committee made no significant recommendations.  It is the latest in a series of reports showing that students are being ill-served by and large by the for-profit college industry.  These schools charge far more for their programs than comparable programs offered by public universities and community colleges. They have very high student-loan default rates and high student dropout rates, and very often they are enrolling students through deceptive recruiting practices and are putting students into programs that are not likely to lead to well-paying jobs.

Why don't we do something about this?  Because the for-profits have very good lobbyists and lawyers sand they make strategic campaign contributions to key federal legislators.

Thus, in the end, the latest report by Senator Harkin's Committee is very much like my fruitless conversations with the shade-tree mechanics of my youth.  "Buddy, your car is in dire need of repair, but we can't fix it."

References

Health, Education, Labor, and Pensions Committee (Senator Tom Harkin, Chairman). Is the New GI Bill Working?: For-Profit Colleges Increasing Veteran Enrollment and Federal Funds, July 30, 2014.   Washington, DC: United States Senate. Accessible at http://www.harkin.senate.gov/documents/pdf/53d8f7f69102e.pdf

Like the Crocodile, American Higher Education is Eating Its Young: Reflections While In Africa

I just returned from Uganda, where I visited several Ugandan universities and toured a game preserve on the upper Nile River. As I viewed the wildlife of Africa--the elephants, the baboons, the giraffes--I was deeply impressed by how fiercely most African species protect their young.

Cape buffalo: Don't mess with my family

I was particularly struck by the cape buffaloes, which are quite effective in protecting their calves from predators. When they sense trouble, the adults instinctively form a circle around their young ones; and acting together, they can even fend off lions.According to my guide, lions do not even try to attack a herd of cape buffalo unless they are in a large group because they know the buffaloes will rough them up.

At least one African species, however, does not protect its young--the crocodile. A guide told me crocodiles will protect their eggs, but after baby crocs are hatched, their mothers show no interest in them. In fact, crocodiles are cannibals; the bigger crocodiles will sometimes eat the small ones.

As I received this information, I could not help but draw a comparison between the crocodiles and American higher education. At one time, we Americans believed our colleges would nurture the young, transmit and preserve our cultural heritage, and prepare our young people for adult life and the world of work. In other words, Americans once considered their colleges to be something like cape buffaloes, which would do all they could to make sure their young grew up to be healthy adults.

I'm not sure Americans believe that anymore. In fact, American higher education today looks much more like a crocodile than a cape buffalo. Every year, the cost of higher education goes up a bit more, requiring students to borrow more and more money in order to attend college. Our college presidents and administrators have become overpaid, arrogant bureaucrats more intent on wooing wealthy donors and constructing impressive buildings than on serving their students.

Crocodile: Come a little closer and I promise you'll have a good educational experience

In particular, the for-profit college industry has exploited low-income and minority students by using high-pressure recruiting tactics to enroll them in expensive programs that frequently do not lead to well-paying jobs. Students who attend for-profit institutions have the highest default rates on student loans, loans which they cannot discharge in bankruptcy.

In short, with each passing year, American higher education--and the for-profit college industry in particular--becomes more and more like the crocodiles, which eat their young, than the cape buffaloes, which nurture and protect them.

And everyone knows this. Indeed, not long ago, President Obama said the for-profit colleges were "making out like a bandit," and his administration has admirably tried to bring them under tighter regulatory control.

But you can't regulate crocodiles; you have to stay away from them. As long as we permit the for-profit college industry to feast off of federal student-aid money, we will have corruption and exploitation. The sooner we face this cold fact, the sooner we will realize that this industry must be shut down.

Of course, as I have just said, the public universities and the non-profit colleges have serious problems as well; but compared to the for-profit colleges, the publics and non-profits are more like alligators than crocodiles. And according to the Ugandans, in comparison to a crocodile, an alligator is merely a Presbyterian.

Not With a Bang But With a Whimper: For-Profit Corinthian Colleges May Close Some Campuses

Yesterday's New York Times carried a story in its Business Section about Corinthian Colleges, a for-profit company that operates under the names of Heald, Everest and WyoTech.  Corinthian has 72,000 students on more than 100 campuses.

Recently, Corinthian announced that it did have enough operating cash to stay in business after the end of this month, and it persuaded the federal government to release some federal student aid money in spite of the fact that it admitted fraud in the reporting of student grades and job placements.  Corinthian has also been sued by the California Attorney General based on allegations that it used high-pressure tactics to recruit vulnerable students--including single mothers.

Like most for-profit colleges, Corinthian relies on the federal student aid program to stay in business. It gets about 90 percent of its revenue from the federal government--about $1.4 billion a year.  DOE's emergency cash infusion (about $16 million, according to the New York Times) may be enough to stave off closing for awhile at least. But that might not be a good thing for students.

As the Times article stated:

If, as critics contend, many Corinthian students are going deeper into debt to gain useless educations, some of those students might have been better off is the Education Department had stuck to its guns and forced Corinthian to close. Federal student loan rules do not require students to repay loans that were canceled while they were enrolled, leaving them unable to graduate.

In most instances, we should not be happy to see a college close, but the for-profit industry is a special case. As Senator Tom Harkin's Committee outlined in its report on for-profit colleges, this sector of higher education only educates about 11 percent of postsecondary students but collects about 25 percent of federal student aid money.  The for-profits have the highest student-loan default rate in the higher education industry; according to DOE, one in five for-profit college students default within three years of beginning repayment. 

And there is ample evidence that for-profit colleges have exploited low-income individuals, encouraging them to take out loans to pay for programs that don't lead to well-paying jobs.  Even if they believe they have been defrauded, these students often have no recourse to the courts, because many of the for-profits require students to sign agreements to arbitrate disputes rather than sue.

Indeed, the Ninth Circuit ruled last year that Corinthian students were compelled to arbitrate their misrepresentation claims against Corinthian--claims that were brought under California's unfair competition law, false advertising law, and California's Consumer Legal Remedies Act. 

To its credit, the Obama administration has been trying to impose regulations on the for-profits, but it suffered a setback in the courts when the for-profits were successful in getting some of the Department of Education's regulations thrown out.  Recently, DOE issued a second set of proposed regulations, but these new regulations will probably just lead to more litigation.

So we should not be sorry to see Corinthian Colleges close--if that event comes to pass. In fact, we should hope this whole unseemly industry collapses.  So far,  the federal government has not been successful in effectively regulating the for-profit college industry.  But perhaps students will gradually wake up to the fact that they would probably be better off enrolling in low-cost community colleges, where they might not need to take out student loans, than to matriculate at high-cost for-profit institutions that have a very poor track record regarding job placement, degree completion, and student-loan defaults.


References

Ferguson v. Corinthian Colleges, 733 F.3d 928 (9th Cir. 2013).

Floyd Norris. A For-Profit College Falters as Federal Cash Wanes. New York Times, June 27, 2014.

U.S. Senate Committee on Health, Education, Labor and Pensions. For Profit Higher Education: The Failure to Safeguard the Federal Investment and Ensure Student Success. 112 Congress, 2d Session, July 30, 2012.

Yet another injustice: For-profit colleges force ripped-off students to arbitrate their claims rather than seek relief in the courts

The federal student loan program is a metaphorical train wreck--the wreck of a passenger train crowded with hapless commuters. The injured are strewn all over the landscape waiting to be treated.

The federal student loan program is a metaphorical train wreck.

If President Obama were a compassionate man, he would introduce legislation to assist the people who have been hurt by their participation in the federal student loan program. But he's not doing that. To extend the train-wreck metaphor further, Obama wants to close his eyes to the carnage on the railroad tracks and focus all his attention on designing a safer railroad car.

The President has done nothing to ease the plight of millions of young people who are burdened by student-loan debt and can't find decent jobs. Instead, he is pushing a college rating system that supposedly will help students make better choices about where to attend college. And he also wants more students to sign up for long-term student-loan repayment plans.

 

Of course, everyone knows that the most egregious student-loan abuses involve the for-profit colleges, which have been accused of high-pressure recruiting tactics and misrepresentations about students' job prospects. From time to time former students have sued for-profit colleges under state consumer protection laws, seeking damages based on claims that they'd been ripped off.

 

But the for-profits have figured out a clever way to stop lawsuits against them. Many of them force students to sign arbitration agreements when they enroll. Under these agreements, students waive their right to sue the college, even if they later believe they were induced to enroll based on misrepresentations. Instead, students are forced to submit their claims to arbitration, which most often benefits the college, not the student. More on this later.

Ferguson v. Corinthian Colleges: Students at for-profit colleges are denied right to a jury trial

Here's a recent example. In Ferguson v. Corinthian Colleges, Inc., decided last August by the Ninth Circuit Court of Appeals, Kevin Ferguson and Sandra Muniz, former students at schools operated by Corinthian Colleges, Inc., sought to bring a class action law suit against Corinthian based on alleged misrepresentations. These were their claims, as outlined by the court:

The thrust of [the former students'] complaint was that Corinthian systematically misled prospective students in order to entice enrollment. Corinth allegedly misrepresented the quality of its education, its accreditation, the career prospects for its graduates, and the actual cost of education at one of its schools. Students were also allegedly misinformed about financial aid, which resulted in student loans that many could not repay. Corinthian also allegedly targeted veterans and military personnel specifically, so that it could receive funding through federal financial aid programs available to those people.

Unfortunately for Ferguson and Muniz, both had signed arbitration agreements with Corinthian or one of its subsidiaries as part of the admission process. Under these agreements, they waived the right to sue Corinthian and agreed to arbitrate any claims under the Federal Arbitration Act (FAA).

When Ferguson and Muniz sued in federal court, Corinthian moved to dismiss their case on the grounds that they were compelled to arbitrate. A federal judge granted Corinthian's motion in part but allowed the former students to seek an injunction against Corinthian in federal court.

On appeal, the Ninth Circuit reversed, ruling that all claims against Corinthian must be arbitrated, including any request for injunctive relief. The Federal Arbitration Act "reflects an 'emphatic federal policy' in favor of arbitration," the court said. Under the Supremacy Clause of the United States Constitution, "the FAA preempts contrary state law" and prevents the states from allowing a party to go to court to resolve claims that the party had previously agreed to submit to arbitration.

Why is Ferguson v. Corinthian Colleges, Inc. a bad decision for students?

Why do the for-profits require students to sign arbitration agreements as a condition of enrolling? Forcing dissatisfied students to arbitrate their claims is advantageous to the corporate universities because students must pay a part of the arbitrator's cost, something many students can't afford to do. In addition, the for-profits prefer to go before an arbitrator rather than a jury, which might be quite sympathetic to a student's claim that he or she was induced to enroll in a for-profit college based on false promises and misrepresentations.

 

Moreover, arbitrators generally do not award punitive damages, their power to grant injunctive relief is limited if not non-existent, and an arbitrator's decision is usually private and not subject to public inspection. No wonder the for-profits require their students to sign agreements promising to arbitrate their complaints and not file lawsuits.

Congress should pass a law barring for-profit colleges from forcing students to sign arbitration agreements

Under the Federal Arbitration Act, as interpreted by the U.S. Supreme Court, states do not have the authority to allow ripped-off students to sue for-profit colleges under state consumer-protection laws if those students signed arbitration agreements, which many of them are forced to do as a condition of enrolling in a for-profit college. This is wrong.

 

President Obama should introduce legislation that prohibits for-profit colleges from forcing students to sign arbitration agreements and specifically permits students to sue for-profit colleges for fraud or misrepresentation under appropriate state consumer-protection laws. The legislation should give students the right to a jury trial, and prevailing students should receive attorney fees and punitive damages when appropriate.

 

Of course, President Obama will never introduce such legislation, and Congress would never pass it if he did. The for-profits are too politically powerful for such a law ever to be adopted.
 

Rather than tackle the abuses in the for-profit college industry, President Obama prefers to introduce a complicated and toothless rating system for colleges--a rating system that will do nothing to reduce the harm so many students suffer when they borrow money to attend a for-profit college or university.

References
 

Ferguson v. Corinthian Colleges, Inc., 733 F.3d 928 (9th Cir. 2013).

President Obama Pushes Income-Based Repayment Plans for Student-Loan Debtors: Madness! Madness!

The U.S. Department of Education is sending e-mails to selected student-loan borrowers, urging them to consider signing up for income-based repayment plans (IBRs) to pay off their student loans. Currently, about 1.6 million student-loan borrowers participate in IBR plans, but DOE wants to sign up 3.6 million additional participants within the next six weeks.  If DOE is successful, more than 5 million people will soon be making student-loan payments based on a percentage of their income over a long period of time--20 to 25 years.

A lot of the major players in higher education like IBRs--"pay as you earn" plans as some people call them. In a co-authored essay in Chronicle of Higher Education, Sandy Baum of the College Board lauded the President's plan for notifying students about IBRs and said IBRs should be the "default option" for student-loan repayment. In other words, unless student borrowers affirmatively opt out, they would automatically be enrolled in a student-loan repayment plan that would stretch their payments out over 20 or 25 years.  Wow, what a super idea!

And how will income-based loan repayments be collected? The details aren't clear yet, but I imagine the feds will do what the Brookings Institution recommends.  Student-loan borrowers will have their loan payments deducted from their payroll checks. The IRS will become the national debt collector, and a student-loan borrower's monthly loan payments will go up or down based on the borrower's current income, like income-tax withholding payments. 

Thus, the day may be coming when former college students will see their monthly student-loan payment appear as just another deduction on their paychecks--like Social Security, mandatory retirement contributions, and federal and state taxes. And for most borrowers, those deductions will last about a quarter of a century.

President Obama probably thinks he is doing college-loan debtors a favor by encouraging them to sign up for long-term repayment plans. He reminds me of Colonel Nicholson in Bridge on the River Kwai. Colonel Nicholson (played by Alec Guinness) is so obsessed with building a bridge for the Japanese army that he loses sight of the fact that he is hurting his country's cause, not helping it.. Not until the end of the movie does the Colonel realize that he has betrayed his country and the soldiers he commands.  The last lines of the movie are: "Madness, Madness!"

Col. Nicholson in Bridge on the River Kwai
"Madness! Madness!"

Why are all the insiders lining up in favor of IBRs? Two reasons:

IBR plans will hide the student-loan default crisis. First and most importantly, IBRs are a cosmetic fix for the soaring student-loan default rate.  As I've explained before, the true student-loan default rate is probably twice as high as the anemic three-year default rate DOE reports every year. In the for-profit sector, the overall default rate is at least 40 percent.  Over the long run, such a default rate is economically and politically unsustainable.

For years now, the for-profits have hid their institutional default rates by encouraging their students to sign up for economic hardship deferments so they won't be counted as defaulters. Millions of people have these deferments, but this shell game can't last forever. Eventually, the government will have to admit that a lot of people on economic-hardship deferments (probably most of them) are really defaulters who will never pay back their loans.

Putting people in IBRs is unlikely to increase the number of people who pay off their loans, but it will obscure the true student-loan default rate for several years. How? If people are automatically enrolled in IBRs, their loan payments will be lowered perhaps as low as zero for people who are unemployed or are in low-paying jobs.  These people won't be paying off their loan balances because interest will continue to accrue.  But they won't be counted as defaulters.

IBRs will take the heat off colleges and universities to keep their costs down.  Second, IBRs benefit the colleges and universities. If students pay for their college experiences based on a percentage of their income instead of the amount they borrow, they will have little incentive to shop for a college based on price. And governmental agencies will have less incentive to try to keep college costs down. Colleges and universities can perpetuate the status quo indefinitely, raising their tuition rates every year without being pressured to keep their costs down.

The for-profits will be the big winners if IBR plans become the default option for student borrowers because their student-loan default rates will drop to zero in spite of the fact that too many students who attend for-profit colleges are paying exorbitant tuition and getting substandard educational experiences.

For most students and for American Society, IBRs will be a disaster. Income-based repayments may make sense for a small percentage of student-loan debtors, but if IBRs become the default option for college-student borrowers, the consequences will be disastrous.

First of all,  as I just said, IBRs reduce students' incentive to borrow as little money as possible to attend college. In fact, many students will conclude that it makes economic sense to borrow to the max. Thus, if IBRs become popular, the total amount of money students borrow every year to attend college will  continue going up--perhaps at a faster rate than in the past.

In addition, mass adoption of IBRs will hurt the American economy. If young people are locked into making student-loan payments for 20 or 25 years, their take-home pay will be smaller and they will have less money to purchase homes, have children, and save for retirement.

But this is the most chilling fact about IBRs: They have the potential for creating a large class of people who are in essence share croppers for the federal government They will be forced to contribute a percentage of their earnings to Uncle Sam for the majority of their working lives. No one can say with certainty what the psychological impact of this arrangement will be on American college graduates, but it could reduce their faith in the American dream and lead to mass cynicism about the American political process.

And IBRs will not increase the number of people who pay off their student loans. I predict that a majority of students who select IBR plans as their student-loan repayment option will be students who pay too much to attend for-profit colleges and don't make enough money after they complete their studies to pay back their loans.  A lot of these people will be unemployed or working in low-wage jobs that entitle them to pay nothing on their loans or to pay so little that their payments won't cover accruing interest.

These poor people will see their federal loan debt grow, not shrink, over the years, even if they make all their loan payments on time.  For example, the New York Times ran a story about a veterinarian who borrowed $300,000 to attend a for-profit veterinary school outside the United States. Even though this individual found a job as a veterinarian and is making regular student-loan payments under an IBR, her current job does not pay enough to enable her to make loan payments that are large enough to cover the accruing interest on her debt. A financial analyst estimated that when this veterinarian completes her 25 year repayment period, the amount of her debt will not have been paid off.  In fact, it will have doubled--from the $300,000 she originally borrowed to more than $600,000!

In short--and I say this emphatically--wholesale adoption of income-based repayment plans is madness and its long term effect will be drive millions of people out of the middle class and into a new class of Americans--sharecroppers for the federal government.

References

Sandy Baum & Michael McPherson. Obama's Aid Proposals Could Use a Reality Check. Chronicle of Higher Education, August 26, 2013. Accessible at: http://chronicle.com/article/Obamas-Aid-Proposals-Could/141265/

David Segal. High debt and falling demand Traps New Vets. New York Times, February 23, 2013. Accessible at: http://www.nytimes.com/2013/02/24/business/high-debt-and-falling-demand-trap-new-veterinarians.html?pagewanted=1&_r=0

Michael Stratford. You've Got Mail. Inside Higher Education, November 4, 2013. Accessible at: http://www.insidehighered.com/news/2013/11/04/education-dept-will-email-35-million-student-loan-borrowers-about-income-based

A For-Profit College president is charged with a felony: Should Taxpayers Be Supporting Dade Medical College?

Last week, Miami prosecutors charged Ernesto Perez, President of Dade Medical College, with failing to report criminal arrests on a government form, which is a felony offense.  Specifically, Perez was charged with failing to report his conviction for battery and exposing himself to a child for a 1990 incident that took place in Wisconsin. He also failed to report his arrest in 2002 for aggravated assault. In addition, prosecutors charged Perez with two misdemeanor counts of perjury.

Ernesto Perez
Former President of Dade Medical College

Prior to this bump in the road, Perez was doing pretty well for himself.  He had twice  been appointed to the Florida Commission on Independent Education, the state agency charged with regulating for-profit colleges in Florida.  Last summer the South Florida Business Journal gave him an Ultimate Miami CEO Award for his "significant contributions to the local community." Not bad for a guy who dropped out of high school to join a heavy metal band.

Dade Medical College is a for-profit college with  2,000 enrolled students on five campuses. In 2012, the college received 87 percent of its revenues from federal aid--$33 million (according to a story in Huffington Post). The college attracts low-income Hispanics and African Americans who pay high tuition.  The vast majority of DMC students receive federal loans or Pell grants, and  25 percent of student borrowers default on their federal student loans within three years of beginning repayment.

Do Dade Medical College students receive good value for their tuition? Maybe not. The Florida Nursing Board put two of its campus nursing programs on probation this year due to low pass rates by DMC graduates on state licensing exams. One student who was interviewed by the Broward/Palm Beach/New Times said she had taken out $48,000 in federal student loans and yet she had professors who merely gave Powerpoint presentations or read from a book.

 Dade Medical College is a prime example of what's wrong with for-profit colleges in the United States.  Run by a high-school dropout and lavishly funded by the federal government, the college has high failure rates on nursing exams and high student-loan default rates.

Why is the federal government funding for-profit institutions like Dade Medical College? Maybe because the for-profit college industry is politically powerful.  Mr. Perez and his wife are big campaign contributors and have made contributions to Barack Obama, Mitt Romney, Harry Reid, and Marco Rubio. 

President Obama and Congress can talk all they want about quality controls on higher education. But the federal government is pumping billions of dollars a year into for-profit colleges and universities that prey on low-income students, provide poor quality education and have high student-loan default rates.  This is a huge scandal that our politicians refuse to address.

References

Patricia Born & Jay Weaver. Homestead mayor's ties to downtown redeveloper probed. Miami Herald, June 8, 2013. Accessible at: http://www.miamiherald.com/2013/06/08/v-fullstory/3441091/homestead-mayors-ties-to-downtown.html

Read more here: http://www.miamiherald.com/2013/06/08/v-fullstory/3441091/homestead-mayors-ties-to-downtown.html#storylink=cpy

Francisco Alvarado. Dade Medical College Has Powerful Friends but Struggling Students.  Broward/Palm Beach  New Times, August 29, 2013.  Accessible at: http://www.browardpalmbeach.com/2013-08-29/news/dade-medical-college-has-powerful-friends-but-struggling-students/

Dade Medical College.  Ernesto Perez to be Honored at SFBJ CEO Awards. 2013. Accessible at: http://www.dademedical.edu/rightnow/ernestoperezbehonoredsfbjceoawards

David Halperin. $33 Million Per Year of Your Tax Money to For-Profit College Whose CEO Hid Criminal Record. Huffington Post, October 21, 2013. Accessible at: http://www.huffingtonpost.com/davidhalperin/33-million-per-year-of-yo_b_4136451.html

Michael Vasquez. Amid criminal charges, CEO of Dade Medical College Resigns. Miami Herald, October 23, 2013. Accessible at: http://www.miamiherald.com/2013/10/23/3706821/ernesto-perez-resigns-as-head.html

 

Read more here: http://www.miamiherald.com/2013/10/23/3706821/ernesto-perez-resigns-as-head.html#storylink=cpy