For Profits and Defaults

Discussion in 'General Distance Learning Discussions' started by humbug101, Jul 1, 2010.

  1. humbug101

    humbug101 New Member

  2. SurfDoctor

    SurfDoctor Moderator

    This is similar to several other stories that have run recently, one on the Discovery Channel. It's a serious issue, students racking up huge debt to get a degree and not being able to pay the student loan payments. However, it's not specific to for-profit schools; traditional schools also have many graduates who can't find a job to pay for their school loans.

    I started a thread not too long ago suggesting that there is a higher education bubble and it will pop at some time. There might very well be an education meltdown in the future. It will not be as severe as the mortgage meltdown, but it will hurt the education sector.
    Last edited by a moderator: Jul 1, 2010
  3. b4cz28

    b4cz28 New Member

    Did you read the comments under the article?
  4. CalDog

    CalDog New Member

    The article profiles investor Steve Eisman, who made a fortune by recognizing the subprime mortgage bubble and betting on its collapse. He now says:

    There is, of course, an important difference between a subprime mortgage and a student loan. You can default on a mortgage, and mail the house keys back to the bank. Or you can declare bankruptcy, and start over.

    But you can't send your education back to the bank. And you can't discharge student loan debt via bankruptcy. Student loan debt is for life.
    Last edited by a moderator: Jul 1, 2010
  5. AUTiger00

    AUTiger00 New Member

    This guy was my favorite:

    "Don,t pay.It is a civil right for a free education, medical care, housing,food and a good paying government job. This country was built on taxes."

    Whatever happened to personal responsibility? No wonder our country is going down hill....
  6. CalDog

    CalDog New Member

    True, but the for-profit schools are a disproportionate part of the problem.
  7. friendorfoe

    friendorfoe Active Member

    I actually wrote a pretty big blog response to this article. The truth of the matter is default rates for both non-profit and for-profit schools alike are climbing. The thing that for-profits have going against them is that they are not tax subsidised, they are open enrollment, they are very good at getting financial aid through quickly and they are very accessible. Yet many if not most offer tuition prices similar to that of state schools. Add to the equation that for-profits are inherently open enrollment and the irresponsible financial aid policies our government has created and yes there is a time bomb waiting to go off.

    But as Eisman knows, the for profits are not to blame and getting rid of them will not solve the problem. What Eisman is doing is exactly what he did in the sub-prime market, betting against the market in the hopes of making a big pot of money. And truthfully history is on his side on this, anytime you remove the risk of a freemarket, make available easy credit that is not easily discharged you will or do have a bubble that will eventually blow up in everyone's faces and Eisman and his buddies will rake it in, laughing all the way to the bank. The only difference here is you cannot bet against the government defaulting on debts and you cannot necassarily buy obligations off of the government to turn profits. Instead you have to go after 3rd party parties with deep pockets and that can be sued though I don't think Eisman's plan involves lawsuits, but instead backdoor deals and contracts. Basically I think he's going to bet that this niche market collapses. The for-profits are simply being set up for a fleecing and it will do nobody any good save for a handful of already very wealthy people (the kind who invest in hedge funds).

    Just like the federal government did not fix the issue with the banks (Freddie and Fannie still abide) they do not seem interested in fixing the financial aid problem. They need to tighten credit, lower the credit ceiling and provide legal methods by which debt can be consolodated, discharged, or otherwise fall within the jurisdiction of the bankruptcy courts. The only reason student debt is not treated like any other unsecured debt is because the Baby Boomer generation became infamous for not paying their obligations, costing taxpayers and/or creditors, this is why there are federally backed loans now. The notion that this is happening today is false however, because the debt will be collected no matter what by the current rules of the game. It may take time, but they'll get their money through garnishment of wages (in states that allow such practices), garnishing IRS refunds or denial of Social Security benefits.
    Last edited by a moderator: Jul 1, 2010
  8. CalDog

    CalDog New Member

    True, but this still leaves one way to break the rules, at least in theory. You leave the United States, and make a new life in a place like eastern Europe, South America, or Asia, beyond the reach of US debt collectors.

    Obviously it sounds extreme, and it is, but it has been happening, in the same way that kids used to go to Canada to avoid serving in Vietnam. For those faced with a lifetime of servitude to US collection agencies -- and this is not unusual based on current debt loads and starting salaries -- then exile may actually seem like a viable alternative.
  9. AviTerra

    AviTerra New Member

    Eiesman was a witness at the Harkin hearings that took place last Thursday.

    Senators Vow to Crack Down on 'Bad Actors' in the For-Profit Sector - Government - The Chronicle of Higher Education

    One of Senator Harkin’s key arguments is that ” While for-profits enroll fewer than 10 percent of American college students, they accounted for 23 percent of Pell Grants and federal student loans in 2008, and for 44 percent of defaults among borrowers who entered repayment in 2007”
    According to the article, “The most critical—and most controversial—witness was Steven Eisman, a hedge-fund manager who, as a short-seller, would profit from a drop in the value of stocks of for-profit colleges.”
  10. b4cz28

    b4cz28 New Member

  11. Go_Fishy

    Go_Fishy New Member

    Well, if the guy really doesn't pay his loans, he goes to prison. Built on taxes as well. :D
  12. SurfDoctor

    SurfDoctor Moderator

    One of the comments below the article brought up an interesting point. I'm not sure I agree, but it is an interesting way to look at it. This person asserts that it's the availability of large student loans that is driving up the cost of education. Students can get hold of over $100K via a loan, so that's what the schools charge. He says that if the loans had a cap on them at $50K, that is what the schools would charge. Limit the loans and the price of a degree would come down. Interesting idea, not sure it would work.
  13. Caulyne Barron

    Caulyne Barron New Member

    If they are enrolling a larger percentage of Pell-grant recipients, then they are enrolling more at need and low income students.

    I know I've referenced it in another thread, but DIY U: Edupunks, Eduprenuers... is a great book that talks about a lot of these issues. The author specifically references the fact that until about the 1980s, it was reasonable to attend community college/state schools, work part time and take out MINIMAL loans and get by on Pell Grants. Can you even imagine?

    If the non-profits would tap the markets and invest in innovation and meeting the needs of a broader and more diverse set of students, and if they really did it better for less money, the for-profits would loose market-share.
  14. friendorfoe

    friendorfoe Active Member

  15. scubasteveiu

    scubasteveiu New Member

    Ahh - availability of credit and its influence on the cost of goods. This is an amazing and interesting topic. Look back at the cost of cars, homes, or in this case education then tie back the availability of credit.....

    Credit in many (most) cases is a bad thing. It fuels are needs in thinking that immediate gratification is ok (hint: the pleasure is in the pursuit not the attainment) and I believe it ultimately increases the cost of any item. We've not even started on the cost of defaulted loans or interest.

  16. friendorfoe

    friendorfoe Active Member

    I believe that is exactly right. Look at the University of Oklahoma for example. Their in state tuition is somewhere around $215 - $230 per hour in a liberal arts undergrad program. That same program however would cost an in state student using their GI BIll $250 an hour because that is the maximum a GI Bill will cover. Thus OU will charge the maximum allowable.

    Other schools, such as Ashford University charge around $400 a credit hour for a grad degree (I think, at least they did) but then once you tell them you are military it goes to $250 an hour because they know, again that this is what the "market will bear".
  17. friendorfoe

    friendorfoe Active Member

    Exactly...if they want to level the playing field they need to compete. If you want to cut down on student loan defaults, etc. you need to reintroduce risk in handing out loans. Wasn't it about the 1980's or soon after that all these policies about not being able to default on Title IV loans came about? I'm asking because I'm not sure.

    I also meant to ask, does anyone know where Eisman and the like are getting their statistics? I've looked and aside from the Dept. of Education I've not seen them anywhere, and even what I've seen at the Dept. of Ed. was more of a quick summary and provided no actual data.
  18. bennylinus

    bennylinus New Member

    You're really dumb if you think America has a debtor's prison. Get your butt out of the medieval ages and join the present day, man.
  19. b4cz28

    b4cz28 New Member

  20. me again

    me again Well-Known Member

    Awesome article!!! There is definitely an education bubble that is being pumped up with easy Federal dollars. As long as the dollars keep pumping up the bubble, it will continue to grow until... eventually... there will be an education collapse where:
    • The perceived value of a college education is diminished.
    • The ROI will be significantly decreased, especially with a glut of unemployed people with those degrees. Having a degree will no longer be perceived as a guarantee of good employment.
    • For-profit and not-for-profit colleges and universities will be forced to lay off educators when the education bubble begins to deflate. This won't just affect crappy schools, but will affect the state universities also.
    The bubble will grow indefinitely, as long as the government keeps throwing money at the bubble.

    It was an excellent article!!!

    Check out this quote from the comments section:


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