Guest Post: The Problem of Excessive Student Debt at For-Profit Colleges

[Editor’s Note: In this guest post, student aid expert Sandy Baum explains why greater regulation of the for-profit college sector is warranted. The post is mostly adapted from a piece she wrote for The Chronicle of Higher Education's Innovations blog, with other parts coming from testimony she delivered earlier this month at a Senate Health, Education, Labor and Pensions Committee hearing on student indebtedness at for-profit colleges.]

By Sandy Baum

The debate about for-profit institutions and student debt is too often framed in ideological terms. Free-market conservatives tend to be on the side of the for-profits. They complain that critics are trying to prevent market forces from working and are apologists for the inefficient nonprofit sector of higher education. Politically liberal voices tend to weigh in on the other side, sometimes arguing that the intrusion of the profit motive into the education arena is incompatible with the interests of students.

The problem of student debt among students at for-profit postsecondary institutions is not a matter of free markets versus government intervention. The market for higher education does and should rely heavily on market forces. However, it is not and never will be a textbook example of competitive markets. The for-profit sector, which has the potential to make important contributions to educational opportunity in the United States, relies on the federal government for most of its revenues. In fact, very few students are actually paying with their own money to enroll in these institutions.

Virtually all students borrow heavily to study in this sector. For example, in 2007-08, 96 percent of bachelor’s degree recipients at for profit colleges graduated with debt, and the median amount they borrowed was $32,700. Most of these students took federal loans, but two-thirds of the four-year college graduates from this sector also relied on nonfederal loans, which carry higher interest rates and lack the repayment protection provisions of federal student loans.

Meanwhile, almost half of the institutions in this sector have official student loan default rates over 20 percent. Students enrolled in these schools constitute 68.6 percent of all for-profit schools' enrollment and account for 66.8 percent of all for-profit students in repayment and 79.2 percent of all for-profit defaults.

This is just part of the overwhelming evidence that large numbers of students, particularly students from low-income backgrounds, are suffering great hardship as a result of the excessive borrowing required to finance their enrollment in for-profit institutions. Institutions that leave students worse off than they were when they arrived are the exception in the public and private nonprofit sectors. Unfortunately, they appear to be the norm in the for-profit sector.

The character of the for-profit sector has changed as it is increasingly dominated by large, publicly held companies that are compelled by shareholders to maximize profit. Where it exists, good will and social consciousness on the part of the officers of these companies can only go a limited distance in determining how the firms operate.

Students who enroll in institutions or programs that graduate fewer than 20 percent (or 15 percent or 30 percent) of their students or that succeed in placing only a small percentage in remunerative positions in the fields for which they have been trained, are playing the lottery. Our political philosophies might lead us to debate whether or not we should prevent them from playing this lottery. But it is difficult to come up with sound principles of public policy that would support our subsidizing them to play this lottery.

The independent students and dependent students from low-income families who predominate at for-profit institutions are those most likely to be making their educational choices without the advice of college-educated parents or well-trained counselors. They deserve added consumer protection, rather than maximum opportunity to make decisions with a high probability of damaging their futures.

Surely there should be better regulation of an industry that is so heavily financed by taxpayers and that has such a dramatic influence on the lives of so many Americans -- particularly vulnerable Americans. Advocates of the sector frequently contend that restrictions on their institutions will deprive low-income students of educational opportunities. But if these opportunities lead to heavy debt and questionable credentials, they are not opportunities in any meaningful sense of the word.

Is it wrong to regulate payday lenders because it might deprive vulnerable individuals of the right to borrow money at extraordinary interest rates and generate debts they will never be able to repay? Is it wrong to regulate car dealers because we might deprive consumers of purchasing cars that have every likelihood of self-destructing on the road? Institutions in the for-profit sector that are serving their students well should be first in line arguing for protection against their colleagues whose drive for profits is exploiting students and undermining our ability to use market forces to the fullest to further our educational goals.

Sandy Baum is a senior fellow at the George Washington School of Education and Human Development and an independent higher education policy analyst and consultant. She has written extensively on issues relating to college access, college pricing, student aid policy, student debt, affordability and other aspects of higher education finance. She was also one of the founders of the College Board's Rethinking Student Aid Study Group, which in 2008 released an ambitious plan for overhauling the federal financial aid programs. Her views are her own and do not necessarily reflect those of the New America Foundation.