This post did not originally indent and attribute the below blockquotes to The Washington Monthly magazine of which they are from. Consider magazine regrets this error and the post has been corrected.
This report on the unsavory dealings of for-profit colleges came to my attention via Mike Konczal, who, for the last few months, has hosted a very interesting discussion of consumer finance issues. Like anyone who has watched more than ten minutes of daytime television recently, I had seen a lot of advertisements for for-profit schools. According to The Washington Monthly:
In the 1980s and early ’90s, it came to light that hundreds of fly-by-night schools had been set up solely to reap profits from the federal student loan programs, in part by preying on poor people and minorities. The most unscrupulous of them enrolled people straight off the welfare lines, and got them to sign up for the maximum amount of federal student loans available—sometimes without their knowledge or consent.
The idea was to get everyone they could into their schools, get them signed up for federal loans, and collect for as long as the student could handle the work. The students would often leave with a large amount of debt but no degree, while the colleges made out like bandits. This party didn’t last long and the government set some reasonable rules.
Under the new rules, for-profit colleges had to get at least 15 percent of their tuition money from sources other than federal loans and financial aid. Also, if more than a quarter of a school’s students consistently defaulted on their loans within two years of graduating or dropping out, the school could be barred from participating in federal financial aid programs. The idea was to get rid of those schools that were set up solely to feed on federal funds and didn’t provide the meaningful training students needed to get jobs and pay off their debt. As a result, during the 1990s more than 1,500 proprietary schools were either kicked out of the government’s financial aid programs altogether or withdrew voluntarily. In an effort to rein in abusive recruiting tactics, in 1992 Congress also barred schools from compensating recruiters based on the number of students they brought in.
Everything’s fine now, right? No. As with most government regulation, the companies that were supposed to reform instead worked at getting around the rules set for them. To deal with the 15 percent rule, they pressured students to take out private student loans usually intended for law and medical students, and have worked to extend lines of credit to students in danger of a quick default so that they will not default within two years of graduation. The colleges evaded the regulations by pushing their students even more indebted. How thoughtful.
Even though they were not functioning as intended, the regulations themselves became less stringent in the early part of this decade.
In his first term, Bush packed the Department of Education with allies of the proprietary colleges. Before becoming the assistant secretary for post-secondary education, for example, Sally Stroup worked as a lobbyist for the University of Phoenix. Under her leadership, the agency took the teeth out of regulations that were designed to rein in abuses of the 1990s, including the incentive-compensation ban for recruiters.
I hate to play the blame-Bush game, but loading the Department of Education with for-profit school lackeys is like putting Rick James in charge of the “War on Drugs.” These loans and practices have placed many students in a position of debt servititude. I think the current administration needs much stronger supervision of these colleges and their encouragement of subprime lending.