The Senate Health, Education, Labor and Pensions Committee’s July 2012 report on for-profit higher education contains a wealth of important and shocking information about the for-profit education industry. Among other themes, the report focuses on the disproportionate default rates in this sector and the harm this causes to students and society. Among for-profit students who entered repayment on their student loans between 2005 and 2008, more than 638,000 students defaulted.
Many school executives point to student demographics to explain the high default rates. We discuss this in detail in our recent report, The Student Loan Default Trap. In addressing this argument, the Committee report emphasizes that when a student takes out a loan, the school is making a de facto investment recommendation. According to the report, “A school that enrolls students who have struggled financially and academically in the past is taking on the responsibility to make sure that those students have a reasonable chance of success. Access to debt is not the same thing as access to the opportunity afforded by a good education.”
You would think that schools would be interested in getting an accurate picture of default rates so that they could help their students succeed. Instead, as the report outlines in detail, many for-profit school executives attempt to lower their default rates through a variety of “default management” programs. This is not intrinsically negative, as the report points out. However, when contacting delinquent students results in the majority being placed in forbearance or deferment rather than repayment and when these policies simply delay default, “…the practice crosses a line from default management to default manipulation.”
The information about forbearance mills is particularly troubling. Too many schools use forbearance and deferment as tools to serve the school’s needs without regard to a student’s particular needs. For example, many student borrowers benefit from entering income-based repayment (IBR). This can provide long-term relief because payments are tied to the borrower’s income and the government forgives remaining balances after 25 years (soon to be 20 years for some borrowers). For those with subsidized loans, interest does not accrue during the first three years of IBR. In contrast, interest accrues during the forbearance period and is added to the principal balance after the forbearance ends. Forbearance is not a long-term solution in any case and leaves borrowers at greater risk of defaulting in the future.
The Committee explains how many schools hire General Revenue Corp. (GRC), a subsidiary of Sallie Mae, to provide default management assistance. According to documents obtained from four large for-profit education companies, on average, over 75% of the students GRC “cured” were forbearances or deferments. If the school “loses” a student to default, they generally don’t bother contacting those students any more. The schools pour resources into default management so that they can keep their default rates as low as possible and avoid sanctions or even possible expulsion from the federal aid programs. Sadly, few pour the same level of resources into job placement. At many schools, students may get hundreds of calls from the debt management offices compared to a few calls per month from career services after graduation, then none at all if the student becomes delinquent. According to the Committee report, some schools, including Kaplan, have gone so far as to hire private investigators to track down students in order to sign them up for forbearances.
Again, forbearances are not intrinsically harmful, but they are rarely the best tools for borrowers seeking to manage their student loan debt over the long term. They are easier to get and so easier for the default management companies to use as a “quick fix”, but they are rarely in the long term interests of borrowers.
In a recent memo, the Institute for College Access and Success reviews even more ways that many schools are manipulating their cohort default rates and calls on the Department of Education to crack down on these practices.
It is simply impossible to understand the scope of the default problem while such rampant manipulation of the data is going on. The data is limited to begin with because it tracks borrowers for such a short period of time, but it can at least provide a consistent framework to measure outcomes across sectors. This can only occur if there is some integrity to the system rather than self-serving school efforts to manipulate the data.
The for-profit higher education business model isn’t working when so many students leave school saddled with debt that they cannot repay. The Committee report focuses on how for-profit education companies have returned tremendous profits to investors while failing students. The costs are way too high for students and taxpayers.