Thursday, October 20, 2011

Without Uncle Sam, for Profit Colleges Would be Out of Business

There were a number of angles I could have taken with this USA Today article published yesterday. The headline was ominous enough: "Student Loans Outstanding Will Exceed $1 Trillion This Year," and the details are even worse:
The amount of student loans taken out last year crossed the $100 billion mark for the first time and total loans outstanding will exceed $1 trillion for the first time this year. Americans now owe more on student loans than on credit cards, reports the Federal Reserve Bank of New York.

Students are borrowing twice what they did a decade ago after adjusting for inflation, the College Board reports. Total outstanding debt has doubled in the past five years — a sharp contrast to consumers reducing what's owed on home loans and credit cards.
I already covered this topic in my August 23rd post, "Colleges are Charging Huge Tuition Fees—Because They Can," in which I wrote:
Of course, this being a mainstream media article, there was still one big elephant in the room that they managed to ignore—the role that the student loan industry plays in helping to jack up tuition costs. Though nominally issued by private institutions, student loans are in fact guaranteed by the federal government, and as such are generally not dischargeable in bankruptcy. Because the lending institutions are thus fully insured against taking any losses, they have no hesitation about freely giving out whatever insane amount of money the student needs to cover their tuition nut.

This means that the real culprit in the out-of-control tuition increases is the federal government. Without student loan guarantees, there would be a natural, market-driven force holding tuition down—namely the actual ability of the students to pay back the loans. The sad fact is that the student loan program, however well intentioned upon its original creation, has become yet another corporate welfare program that sticks the bill on the taxpayer.
Well, now we pretty much have confirmation that I was dead on with what I wrote before. But wait, as with so many other financial issues these days, there is actually a much worse aspect of this story. Here is the USA Today article again:
The highest default rates are at for-profit schools that tend to serve lower-income students and offer courses online. The University of Phoenix, the nation's largest, got 88% of its revenue from federal programs last year, most of it from student loans.
It should be pretty obvious why the default rate for the for-profit colleges are the highest: because their diplomas are not worth the paper they are printed on. Without federally backed student loans, the University of Phoenix and other corporate-run diploma mills would be out of business. And America's biggest suckers, the taxpayers, not only get to ultimately foot the bill for the cost of these poor kids' worthless pieces of sheepskin, but the profit the U of P and the others make by preying on them. What's even worse is that supposedly "austerity"-minded fiscal conservatives have no problem advocating for cutting back on student financial aid, and yet never utter word against the for-profit university scams and the whole predatory student loan system.

One last little tidbit from the USA Today article to consider:
The portion of borrowers in default — more than nine months behind on payments — rose from 6.7% in 2007 to 8.8% in 2009, according to the most recent federal data.
It will be interesting to see the more updated figures when they become available, as it is now clearly obvious that students loans are yet another enormous financial bubble, which will pop as soon as young people wake up to the fact that they are nothing but a gigantic debt trap. Or, as I put it back on August 23rd:
Sadly, because there is still so much money to me made by everyone involved in this scam—from the professors, to the administrators, to the financial institutions—the truth is not being told to these kids. Instead, they will continue to be turned into debt slaves before they even are allowed a chance to get started in life by a thoroughly corrupt system that will not change its ways until that long overdue day when it finally and deservedly collapses.


  1. All true, but the scam extends beyond the diploma mills. All colleges and universities are for profit, i.e. they profit the folks running these institutions, usually at the expense of students destined to a life of non-dischargeable debt-serfdom. This applies to grad schools too, especially law schools.

    As this becomes more obvious, the "legit" insitutions will try to blame it all on the diploma mills. But they've got blood on their hands too!

    As you pointed out in a recent post, BH, much of the OWS movement is driven by young, accomplished people who can't find a decent job and are drowning in student loan debt. Many of them went to "good" schools.

    Many so called "progressives" in well-paid cushy jobs in academia are living high at the top of this ponzi pyramid (that's what our higher education system has become) at the expense of students. They are every bit as execrable as the crooks running Wall Street.

    Even more depressing is the clueless cheerleading for more "education," and thus more student debt serfdom, from President Hopey-Changey, himself a former "academician."

    Is it any wonder young people have started revolting? I'm only surprised it has taken this long!

  2. HueyLewis,


    I completely agree. Hopefully the Occupy Movement can continue to grow, but I fear there are too many Ipods, football games, and other distractions that keep people from noticing how badly they are being screwed, and keep them from thinking straight.

  3. It will take a few more years before enough people catch on to the scam resulting in colleges becoming noticeably distressed.

    After that, the colleges will drop like flies.

  4. @Huey Lewis - very good points.

    Your last sentence reminds me of the old cartoon strip, "The Wizard of Id," in which someone yells to the king, "The Peasants are Revolting!" and he replies, "You can say that again." In our current predicament, Obama is definitely the king.