Paging Sam Nunn: For-Profit Colleges Caught Targeting the Homeless Again

Blog Post
May 3, 2010

Remember the bad old days when unscrupulous trade schools -- set up solely to reap profits from the federal student aid programs -- were enrolling students straight off of the welfare lines and pressuring them to sign up federal student loans they had little hope of ever repaying?

Those times have long past, right? Think again.

According to an investigative report in the latest edition of BusinessWeek by the Pulitzer Prize-winning reporter Daniel Golden, some for-profit colleges have been up to their old tricks, trolling homeless shelters trying to lure their residents in by promising them rich financial aid awards. The big difference now is that these schools are not fly-by-night operations. They are extremely profitable publicly traded or privately held corporations.

Take Drake College of Business, a privately-held institution in New Jersey that trains students in allied health and computer related fields. The school has gone out of its way to attract homeless students, who make up nearly 5 percent of the student body at its Newark branch campus. According to the article, Drake has a pretty unique way (at least we think it’s unique) of enticing these students to enroll:

Late in 2008, it began offering a $350 biweekly stipend to students who show up for 80 percent of classes and maintain a “C” average.

“It’s basically known in the community: If you’re homeless, and you need some money, go to Drake,” says Carmella Hutson, a case manager at the Goodwill Rescue Mission in Newark where about 20 clients have enrolled at Drake in the past two years. “It would put money in my pocket, help me buy a car,” adds Jerome Nickens, 45, who lived at the mission when he talked to a Drake representative but decided not to enroll.

Predictably, officials at Drake say they are doing the Lord’s work -- providing educational opportunities to those with the greatest financial need. What they neglect to mention is the heavy amount of student loan debt that they are pushing these extremely high-risk students to take on to attend the school, which has nearly quadrupled its tuition since 2007.

In fact, federal student loan borrowing has skyrocketed at the institution in recent years, with the school’s total loan volume growing an astonishing 5,550 percent between 2006-07 and 2008-09 -- an increase unrivaled by any other college during that period of time, according to an analysis of federal borrowing data by Student Lending Analytics. Meanwhile student loan defaults at the school are on the rise. According to the U.S. Department of Education, nearly one in five Drake students who entered repayment in fiscal 2007 defaulted on their loans within three years.

The effort by Drake and several other for-profit colleges identified in the article to target homeless students certainly does present “a strong element of déjà vu,” as the article states:

Twenty years ago, the sector had grown wild and unruly, as fly-by-night trade schools siphoned off students from welfare and unemployment lines, ostensibly to train them as truck drivers or hairdressers. Often these enterprises provided little or no schooling; their aim was the federal student aid. Default rates on student loans skyrocketed to 22 percent before Congress enacted tough regulations in 1992. Among them were limits on default rates for individual colleges as well as a cap on the percentage of their revenue that they could receive from the government. The schools were also forbidden to pay recruiters based on how many students they enrolled.

Unfortunately, the consumer protection provisions that Congress put in place in 1992 have largely been gutted in the years since. Up until recently, the for-profit higher education industry had been remarkably successful in getting their friends in Congress and the Education Department to make it easier and easier for them to skirt the rules.

To get around the cap on student loan default rates, for example, schools began hiring companies to aggressively push high-risk students to get forbearances on their loans. Their sole purpose was to prevent these students from going into default during the two-year window when defaults are counted against the school by the Department of Education. Ironically, the school’s intervention left many of these borrowers worse off. While forbearance allows borrowers to stop making payments temporarily, interest continues to accrue on the loans, ballooning the size of the overall debt load.

Meanwhile, lawmakers have repeatedly weakened the Higher Education Act provision requiring schools to get at least 15 percent of their revenue from non-governmental sources. They have done so by both lowering the threshold to 10 percent and substantially increasing the sources of funds proprietary schools could count within that threshold. In addition, they have weakened the penalties schools must face for violating it.

At the same time, Bush administration officials with strong ties to the for-profit sector eviscerated the regulation prohibiting college recruiters from receiving incentive compensation based on their success in enrolling students. They created “safe harbors”  that essentially allowed schools to willfully violate both the letter and spirit of the law.

Is it any wonder that even the most egregious practices from the past have been rearing their ugly head again?