The NY Times Fiercely Attacks Career College Sector

Peter Goodman attacked the career college sector in a NY Times article with the typical allegations of aggressive marketing and high student debt levels. He ended the 3 page rant with the following:

For-profit schools have ramped up their own lending to students to replace loans formerly extended by Sallie Mae, the student lending giant.

These loans are risky: Career Education and Corinthian recently told investors they had set aside roughly half the money allocated this year for private lending to cover anticipated bad debts.

Financial aid experts say such high rates of expected default prove that graduates will not earn enough to make their payments, yet the loans make sense for the for-profit school industry by enabling the flow of taxpayer funds to their coffers: they satisfy federal requirements that at least 10 percent of tuition money come from students directly or from private sources.

“They’re making so much money off their federal student loans and grants that they can afford to write off their own loans,” said Ms. Asher of the Institute for College Access & Success.

Perhaps these "financial aid experts" and the Obama Administration (I'm assuming this includes Bob Shireman's old outfit at the ICAS, which has been one of the most vocal critics of the for-profit sector) should consider that it may in fact be government policies, the so-called 90-10 rule, that have led the sector to charge tuition above the max level of federal loans and grants, in order to comply with the law. Without it, institutions would likely not have to charge as much tuition and students would therefore not be subject to taking on as much debt. If 1/2 of all private loans are expected to be written off as bad, then it would actually be more profitable for Career Education and Corinthians Colleges to set their tuition lower so as to avoid making the excessively risky loans in the first place.

CCA President Harris Miller also responded to Goodman's article.

Unintended Consequences of the 90/10 Rule?

I've been doing some thinking about the so-called 90/10 rule, which stipulates that profit-seeking colleges must obtain 10% of their revenue from non-federal aid sources. Since proprietary schools do not get state subsidies, research grants, or have a massive income-earning endowment (profit-seeking firms would likely re-invest their retained earnings in growth opportunities anyhow, as they don't have the tax advantage of a public or non-profit organization), the other 10% of revenue usually is generated from out-of-pocket tuition charges. In other words, student tuition payments from private funds such as income, family savings, company sponsorship, private scholarship or private loans.

By requiring colleges to come up with revenue sources other than the federal government, politicians believed that profit-seeking colleges would be forced to provide something valuable that students would be willing to pay out of their own pocket for, with the intent of cracking down on the so-called diploma mills operating in the for-profit space. While the implementation of the rule did lead to some for-profit providers closing up shop, I wonder if there are negative unintended consequences as a result.

For instance, it may be possible that profit-seeking colleges have an incentive to set tuition at a level that exceeds the maximum federal student loan thresholds so that students have to come up with the remainder of the tuition on their own. It may also be possible that proprietary schools set their tuition above the combined maximum annual federal loan and grant thresholds, or some ratio of it depending on the particular target student demographics. In the absence of the 90/10 rule, it is possible that profit-seeking colleges might price their tuition at or below the federal aid thresholds.

I plan to empirically investigate this matter in the future. Stayed tuned.