FORT WORTH, Texas (Source: Fort Worth Star-Telegram Fort Worth, Texas) - Where's the line between serving and exploiting a market?That's at the heart of the debate over for-profit colleges, a business that has quadrupled in size during the past decade and saddled thousands with crushing debts they can't pay.
In Texas, students at many for-profit schools are defaulting on loans at twice the national average, according to one analysis. Among students who began repayment in 2008, at least three dozen schools in the state had default rates of more than 30 percent, and one topped 50 percent.
That's an indication that many for-profit colleges are failing customers on a grand scale.
Many critics compare the problem to the subprime mortgage crisis that fueled the housing bust and Great Recession. On many levels the analogy fits, starting with taxpayer money making it all possible.
For decades, college students have been steadily borrowing more for public and private schools. But so-called career schools have the most extreme numbers: A lot more borrowers take out more debt, including private loans, and end up defaulting.
The industry attributes the poor results to a student body that has lower incomes, less aptitude and more family demands. The recession exacerbated their financial problems in the same way that it has hurt all college graduates.
Community colleges and public universities cost much less, sometimes one-fifth the price. But career colleges are often easier to navigate, especially for less experienced students. Programs are focused on career training, often with fewer remedial course requirements, and flexible classes can be fitted around work schedules.
Schools with names like Everest, Kaplan, ATI Career Training Center and the Lincoln College of Technology are filling an important need for underserved students, proponents say.
Lawmakers and consumer groups acknowledge some successes in the sector and say it's an important option for some. But they insist that many for-profit colleges are targeting and preying on vulnerable citizens and maximizing profits at taxpayer expense.
That becomes a public policy issue not just because so many students are deep in debt but also because federal dollars play such a vital role. Federal loans and grants account for almost 90 percent of revenue for some for-profit education companies. The GI Bill and private loans reduce the upfront costs even more for students.
Many don't realize the bills that will come due and don't know that the debt can't be dismissed in bankruptcy.
As one expert said at a Senate hearing last week, the debt can literally follow them to the grave.
An incredible 97 percent of students at two-year for-profit colleges took out federal loans compared with 13 percent at their public counterparts, according to testimony.
At Tarrant County College, where a three-hour course costs $150, just 7 percent of students have loans.
For-profit colleges aren't a niche business. About 12 percent of postsecondary students attend a career school, and they account for a quarter of all federal loans and grants. More than half of those in four-year programs leave with more than $30,000 in debt _ almost five times higher than the share at public schools.
Little wonder that career-college students account for almost half of all defaults.
It's "the second coming of the subprime crisis," Sen. Tom Harkin, D-Iowa, said at the Senate hearing.
He released internal documents intended to show that for-profit schools manipulated their statistics to continue getting federal money. By having students request loan payment delays, they kept a lid on two-year default rates, which are closely tracked by the government.
But defaults soared in year 3 for many for-profit schools, revealing the true extent of the repayment problem.
The industry, represented by the Association of Private Sector Colleges and Universities, didn't testify at the hearing. Republican members of the committee boycotted it, too, reportedly because they're tired of Harkin and others berating the industry. Consumer groups say the industry has spent heavily on lobbying _ about $12 million since 2010, according to news reports.
The industry objects strongly to the subprime analogy. It said the mortgage crisis was caused by speculation by borrowers and lenders, who suffered when home values fell. In its view, an education isn't the same risky bet.
"No one questions the need for more college-educated workers," the group said.
True enough, but cost matters. And too many lose sight of that.
One reason the subprime comparison fits is that both start with a noble goal that's widely embraced: more college choices for more students and homeownership for more people.
Taxpayer money is the foundation for both, with federal underwriting for student loans and grants and almost every mortgage. And each field has plenty of profiteers, including publicly traded companies and investment banks, that make out well even when their customers fail.
And the strongest parallel?
"The industry is pushing people into debt that they can't afford, and the industry doesn't bear the risk," said Lauren Asher, president of the Institute for College Access & Success, a California group that tries to make higher education more available and more affordable.
Some students at traditional colleges borrow too much and don't land the jobs they expect. But data show that that happens to a large proportion of students at for-profit schools, testified Sandy Baum, a policy analyst for the College Board.
"Institutions that leave students worse off than they arrived are the exception" at traditional schools, she said. "Unfortunately, they appear to be the norm in the for-profit sector."
Rules released this month link federal funding to three-year default rates and the ratio of loan payments to income. But no schools will lose eligibility until at least 2015, a delay that sent stock prices soaring for companies in the sector.
Officials defended the time frame, saying the goal is to help for-profit colleges adjust because many students depend on them.
The reason so many for-profit students are overwhelmed by debt is not complicated, Harkin said. A two-year program for $6,000 to $9,000 at a community college will cost $35,000 to $46,000 at career schools. Four-year programs cost two to three times as much as at public colleges, he said.
Guidance counselors always tell students to look for the right fit in a college. They should drive home the value proposition, too. For too many, it's become a ticket to financial disaster, not prosperity.
Source: Fort Worth Star-Telegram Fort Worth, Texas
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A service of YellowBrix, Inc. Publication date: 2011-06-20