The Student Debt Cancer: For-Profit Universities

Today, I want to discuss the level of student debt and the debt cancer known as “for-profit education”.   Recently, I read a Kansas City Fed paper, “Student Loans: Overview and Issues” written by Kelly D. Edmiston, Lara Books and Steven Shepelwich.  Here’ the link.  This paper is the basis of these comments, although I have updated some of the numbers (last week the NY Fed released more recent debt numbers).  Here’s what you should know:

1. Outstanding student debt is $956 billion.  In the last seven years, this has grown at (approximately) a 14% CAGR!

2. The percent of student loan balances that are 90 days delinquent is 11%.

3. The delinquency rate is grossly understated – it is probably closer to 22%!  I’ll quote a footnote from the NY Fed’s Quarterly Report on Household Debt and Credit.  It said, “As explained in a recent blog post, these delinquency rates for student loans are likely to understate actual delinquency rates because almost half of these loans are currently in deferment or in grace periods and therefore temporarily not in the repayment cycle.  This implies that among loans in the repayment cycle delinquency rates are roughly twice as high.”   (Emphasis added)  In other words, if you’re in school, you can’t be delinquent because you don’t have to pay yet (and this artificially lowers the delinquency rate).

4. For the first time ever, the percentage of student loan balances that are 90 days delinquent is higher than the percentage of balances of credit card loans that are delinquent (and we’re using the bogus 11% delinquency rate here).

5. While 50% of students at four-year colleges received federal student loans in 2009 – 2010, 86% of students at for-profit institutions received federal loans.

6. Compared to public four-year colleges, for-profit institutions are more expensive!  Of course, this seems strange since you don’t have expensive faculty or as many amenities (like the rec centers, college sports, student centers, etc.).  Of course, telemarketers, oops, I mean admission counselors, have to be paid.

7. Public university students had a 5.2% default rate in 2009 (the most recent statistics we have), private (non-profit) university students had a 4.5% default rate and for-profit institution students had a 15.4% default rate!

8. From 2000-2010, there was a 30% increase in enrollment in traditional colleges and universities.  Enrollment in for-profit universities increased nearly 450% during that time period!  See KC Fed chart below.

Enrollment growth

9. Six-year completion rates are 65% for private (non-profit) schools, 56% for public universities and 28% for for-profit colleges and universities.

10. Quoting from the KC Fed paper, “Graduates from for-profit institutions also are more likely to be unemployed and tend to make lower incomes upon leaving than do those from more traditional institutions, whether or not they have graduated.”

Let me be clear…there are some very good for-profit private institutions.  They tend to specialize in training students with a particular skill.  In addition, people argue that these institutions are attracting students who don’t have access to other schools.

With that said, the numbers I have presented make some general conclusions about these for-profit schools very clear.  These schools are in business to take federal dollars and turn them into profits. In order to do this, they attract and admit students who will not graduate.  Virtually all of their students obtain federal loans.  Even if they do graduate, they will earn less money than graduates of public universities.  Yet, these for-profit schools charge more than public universities.  When someone takes on student debt (which usually can not be discharged in bankruptcy) and they don’t get any additional income (because they didn’t graduate or their degree is worthless), we are simply selling them a future that is not much different than a debtor’s prison.  And remember, to the extent that these loans are never repaid, it’s taxpayers who have lost – because we’re the ones who are making these loans.  To make matters worse, these for-profit institutions are growing at a much faster rate than traditional universities.