The subprime student crisis

More than five years ago, 60 Minutes covered the scandal of for-profit colleges, many of which have “earned” tremendous profit providing mediocre education to people who cannot afford the outrageous cost (some charging $80,000 or more) but instead borrow the money from the U.S. government:

“I don’t believe [CEC] would [have become] a $1 billion company in 10 years, if it weren’t for the federal government loan programs,” says Tami Hanson, who was once the national manager in charge of student placement for all of Career Education Corporation’s campuses…

“[It was] All about the numbers, all about the numbers,” says Hanson. “Getting students enrolled, getting students in the seats. Keeping students in the seats, getting them passed enough to graduate, and then trying to get them any job we could.”

But getting students any job they could did not necessarily mean getting them jobs they were trained for. And she says a job placement could mean just about almost anything.

“It may be that, you know, they end up placing them folding T-shirts at the Gap as a fashion grad — which is fine, but not what they were promised in the beginning,” says Hanson.

“And a job they could’ve gotten without paying $15,000 or $30,000,” says Kroft.

Actually, it is more like $30,000, $60,000 and $80,000 depending on the program, says Hanson.

Recently, Frontline aired a jaw-dropping story on this continuing — and now even larger — scandal:

MARTIN SMITH: He invests in failing universities and injects them with large amounts of capital. When they go public, he can make a bundle of money in the process…. One of his schools was involved in a major 2008 IPO on Wall Street, Grand Canyon University. You may never have heard of it, but today it’s valued at $1.2 billion…. A former musician who never attended college, Michael Clifford is an unlikely player in the rarefied world of academia.

MICHAEL CLIFFORD: I was doing a lot of cocaine, drinking a lot, smoking a lot of pot from the music business, then the club scene. Somebody introduced me to Jesus Christ by reading me the Bible, and it changed my life. I became a born-again Christian. And then my spiritual mentor, a guy named Bill Bright from Campus Crusade for Christ International, sat me down one day and said “You need to get into post-secondary education.” And I said, “Bill, I’ve never gone to college. I don’t know what you’re talking about.”

When I came home and told a couple of my friends that I was going to buy a university, they all said, “Are you back on crack or something?” I mean, no one buys a college. And I said, “No, no. I think it can be done.”

MARTIN SMITH: Today, Clifford is part of a movement that is transforming the way we think about higher education in America. He and his investors have turned around a half dozen colleges that now enroll close to 40,000 students.

[on camera] There are people who would say, “Look, this guy, Michael Clifford, he never went to college. He was a musician. He sort of drifted around. He had a born-again experience.” Do you have the credibility, do you have the bona fides to be determining the future of colleges around the country?

MICHAEL CLIFFORD: No, I don’t. But I’m doing it. And I think that’s the great thing. Only in America. I mean, my new book is called How to Run a College by a Guy That Never Went to One.

MARTIN SMITH: [voice-over] Clifford doesn’t act alone. He attracts some of America’s biggest investors, like former GE chairman Jack Welch. According to The Wall Street Journal, Welch invested $2 million in one of Clifford’s schools.

JACK WELCH, CEO, General Electric, 1981-01: I invest in bonds and other things, invest in all these widgets I invest in, private equity, or invest in a school. It’s education- for profit. I like this investment more than any one I got.

Michael Lewis' “The Big Short” profiles investor Steve Eisman and his highly profitable bet against subprime mortgages. Eisman is now shorting the for-profit education industry because, he says, it’s another subprime mortgage fiasco:

Eisman blasted the for-profit education industry, likening these companies to the seamy mortgage brokers who peddled explosive subprime loans over the past two decades. “Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry. I was wrong.” …

The for-profit education sector has soared over the past decade, making companies like ITT and Apollo Group into heavyweights. Driving much of the growth, Eisman explained, was the sector’s easy access to federally guaranteed debt through Title IV student loans. In 2009, he said, for-profit educators raked in almost one-quarter of the $89 billion in available Title IV loans and grants, despite having only 10 percent of the nation’s postsecondary students.

Eisman attributes the industry’s success to a Bush administration that stripped away regulations and increased the private sector’s access to public funds. “The government, the students, and the taxpayer bear all the risk and the for-profit industry reaps all the rewards,” Eisman said. “This is similar to the subprime mortgage sector in that the subprime originators bore far less risk than the investors in their mortgage paper.”

…Another similarity between subprime lending and for-profit education is this, Eisman said: Both push low-income Americans into something they can’t afford—in the schools' case, pricey programs that leave the students heavily in debt; what’s more, the degrees they get mean little in the real world: “With billboards lining the poorest neighborhoods in America and recruiters trolling casinos and homeless shelters—and I mean that literally—the for-profits have become increasingly adept at pitching the dream of a better life and higher earnings to the most vulnerable.”

Eisman went on to cite the industry’s dropout rates of 50-plus percent as another sign of poor quality; the numbers are likely understated, he added, given that the industry reports them voluntarily. “How good could the product be if dropout rates are so stratospheric?” he asked. “Default rates are already starting to skyrocket. It’s just like subprime—which grew at any cost and kept weakening its underwriting standards to grow.”

Who’s on the hook? Not the colleges. If the college provided a crappy education and a worthless diploma that can’t pay the bills, that’s the student’s problem… and yours and mine:

MARTIN SMITH: In 1994, Anne Cobb was a 35-year-old single mother making less than $8,000 a year and living on food stamps when an enrollment adviser from the University of Phoenix helped her get a student loan.

ANNE COBB: It was just such an incredibly simple process. I mean, it was, “Sign a few places here,” and you know, “We’ll let you know, and I’m sure you’ll be approved.” And I said, “Well, I’m not sure. I have a lot of bills. Is it still going to be OK?” “Oh, yeah. No problem. No problem at all. Don’t worry about it. Just sign here.”

MARTIN SMITH: Cobb graduated in 1999 with over $30,000 in debt. Over the course of a decade, with deferments, consolidations and penalties and an interest rate that has gone as high as 14 percent, the amount now due has ballooned to over $60,000.

ANNE COBB: You never hear these stories. You hear the happy stories with the double-car garage and the great house and everything else. You don’t hear these horror stories.

MARTIN SMITH: Cobb is not the only person with large student debt. There are many like her, and this has some people worried.

DAN GOLDEN: The concern is that they’re bringing in students who can’t succeed or graduate, loading them with debt. And the for-profit college is not the one that is on the hook, it’s you and me. It’s the taxpayer. It’s the federal government.

In other words, expect another massive taxpayer bailout. Privatize the profit. Socialize the losses. It’s the (new) American way.

Posted by James on Friday, May 28, 2010