The Beginning of the End: Signs Are Everywhere that the Student Loan Program Is Collapsing

In the spring of 1940, just before the Battle of France, the people of Paris were enjoying themselves. As William Shirer wrote in The Collapse of the Third Republic:

The sands at Auteuil were full for the annual spring racing, and betting was heavy. Crowds flocked to the spring art exhibition at the Grand Palais. The cinemas and theaters played to full houses. The windows of the great jewelry shops in the rue de la Paix sparkled with diamonds and other gems, and inside business was good. (p. 604)

And then the Germans invaded the Low Countries and within a month the Nazis were in Paris.

When the party's over, it's over.

American  higher education, it seems to me, is behaving much as the Parisians did on the eve of their World War II disaster. Tuition goes up every year, even though the colleges offer steeper and steeper discounts just to lure students in the door. The average freshman now pays just 50 percent of a college's sticker price.

Meanwhile, the major public institutions of the South and Midwest pay their varsity football coaches $4 million and even $5 million a year to producing winning teams; and the assistant coaches often make a million dollars a year or more.

The campus book stores sell fewer and fewer books but make a profit selling junk.  Fewer books means more space to sell college-branded  t-shirts, sunglasses, and coffee mugs at outrageous prices. Most campuses now have a Starbuck, where students can buy elaborate coffee drinks for $5 a pop.

More and more, colleges and universities are outsourcing their student services. University employees no longer cook the meals.  Let them eat at Taco Bell, conveniently located in the Student Union. As a percentage of  total college enrollment, fewer and fewer undergraduates live in college dorms. Instead they flock to expensive, privately developed coed student-housing ghettos that provide undergraduates with swimming pools, game rooms, and plenty of space to park their late-model cars.

And why not? Student loans will pay for just about everything. And if the kids need more money than they can borrow on their own account, mom and pop will be glad to co-sign student loans at private banks. Total outstanding student-loan debt is now $1.3 trillion.

But it can't go on forever.

Almost 7 million people are currently in default on their loans, which means they haven't made a student-loan payment for more than a year. Millions more have obtained economic hardship deferments and aren't making student-loan payments.

More and more people have signed up for income-based repayment payment plans that stretch out the loan repayment period to as long as 25 years--3.9 million people, according to the Department of Education. That's a 56 percent surge in just one year.

DOE describes the uptick in long-term repayment plans as a victory because students' monthly payments go down. But many people in these plans are making payments so low they will never pay off their loans. And anyway, who wants to pay a percentage of their income for a quarter of a century just for the privilege of getting a crummy college education?

Nor is it clear that most people will stick with a long-term payment plan for 25 years. Not long ago, DOE reported that more than half of the people in those plans failed to report their annual income, a prerequisite for continuing in an income-based repayment program.

This house of cards is about to come tumbling down. Already, private liberal arts colleges are folding or on the verge of folding as students realize that it makes no sense to pay $40,000 or $50,000 a year to attend a nondescript private liberal arts college in nowheresville. Sweetbriar's debacle is just the first of many more college closings to come.

And the bloom is off the rose for the for-profits, which have been insanely profitable for the private equity groups and wealthy investors who own them. Corinthian Colleges' bankruptcy is but the harbinger of a major shakeup in the for-profit college industry.  And what happens to Corinthians's 300,000 former students, most of whom used student-loan money to pay their tuition? How many Corinthian alums will pay back their student loans?

There's only one solution to this giant economic disaster--reasonable access to bankruptcy for overburdened student-loan debtors. But DOE and its loan-collection agencies fight student-loan bankruptcies tooth-and-nail. DOE even opposed bankruptcy relief for a quadriplegic debtor who was working full time but couldn't make enough money to compensate his full-time caregiver and and still pay his fundamental living expenses (Myhre v. U.S. Department of Education, 2013).

DOE knows that if bankruptcy relief becomes an option for people who are swamped by their student loans that a flood of debtors will flow into the bankruptcy courts. If that ever happens, this enormous fraud on American young people will be exposed.

So colleges and universities waddle long, academic year after academic year, jacking up their tuition and hiring more and more bureaucrats and administrators.  College presidents hob nob with wealthy donors and watch the football games in executive sky boxes.  Tenured professors teach less and less, and low-paid adjuncts teach more and more of the college curriculum.

But the metaphorical equivalent of German panzer tanks are hiding in the shrubbery of our well-groomed college campuses. And some day soon, American higher education--the envy of the world our college leaders tirelessly assure us--will collapse.

References

Mitchell, Josh. School-Loan Reckoning. 7 Million Are In Default. Wall Street Journal, August 21, 2015.

Myhre v. U.S. Department of Education, 503 B.R. 698 (Bankr. W.D. Wis. 2013).

Shirer, William. The Collapse of the Third Republic. New York: Simon and Schuster, 1969.

Student Loan Forgiveness for Students Who Attended One of the Schools Owned by Corinthian Colleges: I Recommend Chiang Kai-Shek's Fire Hose Approach

Chiang Kai-shek was the  leader of the Nationalist government of China for many years, but he was also a Methodist of sorts. I read somewhere that he once baptized his soldiers en masse, using a fire hose.  I'm not sure that story is true, but I like to think of all those Chinese soldiers who became Methodists. I'm sure it did them a world of good.

Regardless of the truth of that story, I believe the Department of Education should adopt Chiang Kai-shek's  fire-hose technique when designing a student-loan forgiveness program for all the people who attended one of  institutions operated by Corinthian Colleges--which is now bankrupt.

Chiang Kai-shek: Did he baptize his troops with a fire hose?

The Department of Education is designing a process whereby students who attended a Corinthian campus can apply for loan forgiveness, which at least some of them are legally entitled to do due to Corinthian's shutdown. According to the New York Times, DOE estimates that 350,000 people attended one of the Corinthian  campuses over the past five years. If all of them apply for loan forgiveness and receive debt relief, it will cost taxpayers $3.5 billion.

In the past, DOE has utilized a cumbersome loan-forgiveness process for  students who attended colleges that closed, and DOE says that only 6 percent of students who were eligible for debt relief due to a college closure  actually applied for that relief (as reported in the New York Times).

Secretary of Education Arne Duncan promises a streamlined loan-forgiveness process for former Corinthian students. "We will make this process as easy as possible for them, including by considering claims in groups wherever possible" Duncan said.

But why make Corinthian students jump through hoops to have their student loans forgiven--any hoops at all? Why not adopt Chiang Kai-shek's methods and forgive all those loans en masse? I agree with Luke Herrine, a member of the Debt Collective, who argued that all Corinthian students should be given "blanket relief."

Why give blanket loan -forgiveness to former Corinthian students? First of all, the government is not going to get that money back anyway. In all likelihood, a majority of Corinthian students will either default on their loans or apply for economic-hardship status that will exempt them from making loan payments until they get on their feet financially, which for many Corinthian victims will be never.

Second, the Department of Education is morally responsible for the mess it created by shoveling student-aid money to for-profit colleges that paid their executives lavish salaries while delivering substandard educational programs. A quarter of all student-aid money goes to for-profit colleges, which have the highest default rates. 

The for-profits have kept this shell game going by hiring lobbyists to represent their interests, employing lawyers to file lawsuits to stop DOE's regulatory efforts, and making campaign contributions to strategic members of Congress.  In fact, Corinthian's bankruptcy filings lists its lobbyists as some of its creditors.

No, DOE needs to spray all these students with a metaphorical fire hose, forgiving Corinthian's former students' loans through executive action. These unfortunate folk have been through enough. Duncan shouldn't make them fill out any more forms in order to rid themselves of student-loans they took out to attend one of Corinthian's colleges.


References

Tamar Lewin. Government to Forgive Student Loans at Corinthian. New York Times, June 9, 2015, p. A11.

Help for Victims of College Fraud (Editorial). New York Times, June 10, 2015, p. A24.

Is it OK to beat a dead horse? The Consumer Financial Protection Bureau sues Corinthian Colleges

According to Chronicle of Higher Education, the Consumer Financial Protection Bureau has sued Corinthian Colleges, accusing the company of "predatory lending and illegal collection tactics." 

As the Chronicle noted, Corinthian is "the crippled for-profit higher-education company that is in the process of winding down its operations."  In fact, Corinthian has entered into a deal with the U.S. Department of Education, whereby the company will sell or close most of its campuses in exchange for continued access to federal student aid money.

The CFPB is accusing Corinthian of some pretty bad stuff. "We believe Corinthian lured in consumers with lies about their job prospects upon graduation, sold high-cost loans to pay for that false hope, and then harassed students for overdue debts while they were still in school," Richard Cordray, the CFPB chief,was quoted as saying in the Chronicle article.

If Corinthian Colleges did the things the CFPB accused it of doing, then it certainly deserves to be sued. But, as the Chronicle of Higher Education pointed out, the company was already in financial trouble. 

I am happy to see the Consumer Financial Protection Bureau take some strong action against the for-profit college industry, which has been wracked by reports of abusive behavior.  Several for-profits have been accused of engaging in unsavory practices. But I would be happier still if the CFPB would go after abusive for-profit colleges that are not teetering on the edge of closure.  

It is OK, I suppose, to beat a dead horse now and then. But I would like to see the CFPB to beat a few live ones.

References

Field, Kelly. Federal Watchdog's Lawsuit Accuses Corinthian Colleges of Predatory Lending. Chronicle of Higher Education, September 16, 2014. 

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.