Today's Headlines: For-Profit Universities Under The Gun

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Today's Headlines: For-Profit Universities Under The Gun
September 13, 2016

ITT Shutdown Leaves Students Scrambling

Students seeking alternatives to traditional universities and community colleges have for decades found a willing home in for-profit universities. Well-known brands like the University of Phoenix and ITT Technical Institute have been aggressively marketing to non-traditional college students nationwide.

Unfortunately, too many for-profit schools overpromised and under-delivered to their students in ways that were questionable enough to require regulatory actions. Too often, these students were given inadequate training to succeed in their chosen field while being burdened with student loan debt — making them worse off than they were before.

Over the past few years, a perfect storm of bad publicity, declining enrollments, and new regulations has taken a toll on for-profit universities. Multiple for-profits have closed entirely, including some of the larger national schools. ITT Tech's recent closing of all locations leaves more than 40,000 students in search of a new degree program.

While this action protects new students from acquiring massive debt for sub-par learning, it leaves many current students and those planning to enroll in the lurch. Where do they go now to further their education, and how will students deal with any debt that they have already incurred?

Crackdown or Extinction?

In 2014, the Department of Education (DOE) noted that less than 50% of students in public universities borrowed money for higher education as compared to 80% of those at for-profit universities, and that income from student loans often accounted for 90% of the income at for-profit schools. Because of the poorer outcome rate, for-profit students accounted for 44% of federal student loan defaults even though they represented only 11% of all higher-education students.

That year, the Obama administration announced regulations to hold for-profit schools more accountable for the outcomes of their students. To retain access to federal student aid programs, for-profit universities had to be transparent about their student's success rates and take steps to prevent excessive student debt and improve outcomes. In other words, their students must show suitable return on their collegiate investment.

DOE cleverly tied student loan debt into the regulation by making student loan access dependent on a typical graduate's estimated average loan payment compared to his or her income. The typical loan payment could not exceed 20% of the typical graduate's discretionary income or 8% of total income.

The effect has been profound. Since the regulations took effect in June of 2015, for-profit universities have been dealing with increasing fines, sharply declining enrollment, and closures. Corinthian College closed in 2015 after being hit with a $30 million fine for misrepresentation of their student's success in job placement. The Wall Street Journal reports that enrollments at for-profit universities DeVry University and Bridgepoint Education have declined by more than half of their 2012 enrollment.

Industry advocates cry foul, saying that while there are bad actors within the industry, the DOE approach is overly broad and heavy-handed. The enforcement mechanism that limits access to federal student aid squeezes the cash flow of for-profit institutions in several directions.

The ITT Tech case illustrates the cash-flow problem. DOE requires an irrevocable letter of credit from for-profit universities on probation in order to fulfill any liabilities in case the school should abruptly close ($80 million in 2014 in the case of ITT Tech). In April 2016, the Accrediting Council for Independent Colleges and Schools considered pulling ITT Tech's accreditation because of concerns about financial viability — causing DOE to raise the line of credit to $123.6 million. ITT Tech subsequently notified investors that it could have trouble meeting other DOE demands because of the amount of cash DOE already held in escrow, furthering the spiral.

There is a simple way to avoid this problem — meet the requirements and don't go on probation in the first place. However, it's fair to ask whether non-complying schools have been given enough time to meet the requirements, and whether the thresholds will take out useful programs as well as questionable ones. Colleges can control the quality of education they provide, but not that their students will take full advantage of it — nor can they control the job market that their students will face.

The Student Debt Effect

The for-profit crackdown should prevent future students from incurring more student loan debt than they can afford to pay off, but it is unlikely to stem the avalanche of collective student loan debt. Rising college costs have pushed overall student loan debt levels into new territory. The St. Louis Federal Reserve shows that the collective student debt has topped $1.36 trillion, trailing only mortgage debts in American volume of debt.

Student debt may drop slightly due to one mechanism: debt forgiveness. The collapse of Corinthian College resulted in $170 million of student debt relief. The ITT action is likely to top that number to keep students out of an untenable debt situation — one of the very situations the Department of Education wanted to prevent.

In a cruel irony for abandoned ITT students, those who have the ambition and the ability to transfer to another school to complete the same degree are not eligible to have their federal student loans forgiven under a closed-school discharge. This mechanism allows students affected by a closed educational institution to cancel their debt and clear adverse effects of the loan with the credit bureaus.

Students have an alternate path to discharge debt if they can prove the school used "illegal or deceptive practices" to induce them to borrow their college funds in violation of state law, but the Washington Post reports that there are 350 such claims from ITT students as of June 2016 with no loan cancellations granted so far.

In the short term, abandoned ITT students must tread carefully to avoid being stuck with debt in spite of government assistance. In the longer term, we will all likely end up paying for that relief with our tax dollars.

The Takeaway

For-profit universities and colleges have had a mixed history, and the Obama administration is justified in pressing for students to receive a suitable education for their investment. To further this aim, the administration has chosen the effective tool of the pocketbook.

It is effective, but dangerous, to tie student loans to incomes because this assumes a relatively stable and growing job market. Imagine if this rule had been applied immediately before the Great Recession. Would any for-profit institution have survived DOE scrutiny, regardless of the quality of their curriculum? How would non-profit schools have held up under the same standard?

The end result is painful for students in transition and it will probably be even more painful for taxpayers as loan forgiveness options are put forward. According to The Wall Street Journal, a proposed DOE plan to forgive loans of defrauded students at both for-profit and non-profit institutions could cost as much as $43 billion by DOE estimates.

Let's hope the government puts just as much effort into the front end of the problem — how to reduce the cost of a quality higher education and find legitimate career-training alternatives for those shut out by the recent crackdown on for-profit schools.

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Kyle | 09.13.16 @ 15:53
This really doesn't surprise me much at all, considering all the drama circulating around ITT tech recently. It's actually rather scary.
Brittany | 09.13.16 @ 15:55
I have a few friends that have been really worried about the whole ITT Tech drama that has come up recently because they went there or were going there and now they don't really know what the heck happens from there. It's kind of scary. Things like this don't really make going through a for-profit university/college very comforting.
Carla | 09.13.16 @ 15:57
I feel bad for those students left behind in this shutdown. I do understand why this had to happen to protect future students though. So much is needed to repair the system to reduce the high cost of an education. I hope it gets better soon.
Daniel | 09.13.16 @ 15:58
I have personally seen in some I know the failure of these schools, it really is terrible for all those that put their time and money in and did not get what they deserved. We really need a revamp to our higher education system
Jane | 09.13.16 @ 16:05
People need to perform due diligence and thoroughly check out a private school they are thinking about attending. I attended state universities and I feel my education was comprehensive. I also know people who attended private colleges/universities and received comprehensive education. They checked the schools out first for how they rated within the degree program for which they were going to sign up.
Zanna | 09.13.16 @ 16:15
I had often considered going to back school online, but had some concerns about the quality vs. price. It's good that they are providing some oversight now, but these regulations should have been in place sooner. I hope those enrolled at ITT are able to find another school to work with!
Chrisitna | 09.13.16 @ 16:19
All students should be able to receive a valid education for the money they spend - this is a great first step in overhauling the entire education system and creating more affordable ways to get a degree.
Steffanie | 09.13.16 @ 17:31
I am not shocked by this. I have heard they weren't doing well financially. I just feel bad for the students who don't have any other alternatives.
Sara | 09.13.16 @ 19:12
Was really iffy about ITT tech anyways and this confirms it. I do feel bad that students who were there and trusted the school did this to them. However, hopefully this will help students stop going to for profit schools.
Gabriel Flores | 09.13.16 @ 21:09
I understand how SOME of these schools might be hurting the system. But there are successful graduates too who are now going to be discriminated against. How about the many successful graduates of years past? They are now going to be discriminated against as the vilifying of the for-profit industry succumbs us all
Gabriel Flores | 09.13.16 @ 21:10
I went to the fully-accredited for-profit University of Phoenix and I can honestly say I received an exemplary education and it was much better than any education at any not-for-profit state public universities I have attended. I learned amazing skills and consider myself a scholar who is published and notable in his field. Not all for-profit schools are "bad" and many schools are changing and adapting to the new rules, for the better! Oh, and let us not start a new form of discrimination where we discriminate against for-profit graduates. These are some of the hardest working Americans I know! Finally, nobody should ever undermine anyone’s education. I love the University of Phoenix and so do its 1,000,000 alumni. Best education ever. FYI- My loans are all paid off.
$commenter.renderDisplayableName() | 01.16.21 @ 14:10