Duped into High Cost, Private Loan Debt?

Have some for-profit colleges knowingly misled students into taking out high-priced private student loans?

That question has been raised by a lawsuit recently filed against the student loan giant Sallie Mae, accusing the company of engaging in discriminatory lending policies. In the lawsuit, one of the plaintiffs — Cathelyn Gregoire, a former student at the International Academy of Design and Technology in Tampa — claims that her school duped her into borrowing a high interest private loan. According to the complaint, after Gregoire inquired about the availability of financial aid at the institution, the school applied for a Sallie Mae private student loan on her behalf. The International Academy is a small chain of proprietary schools owned by the giant publicly-traded, for-profit higher education company Career Education Corporation.

According to the lawsuit, school officials told Gregoire that the loan she would receive would have an interest rate of about 7 percent. However, the Sallie Mae loan she received from the school had an uncapped variable interest rate that is now close to double that rate — and that’s without counting the additional 6 percent origination fee that was tacked on to it. Gregoire, who dropped out of the school after about a year when she learned that the credits she had earned would not transfer to other institutions, currently is facing payments of about $800 a month, an amount, the complaint says, “she simply cannot afford.”

Now we don’t want to jump to any conclusions. This is just a lawsuit and we don’t know if Gregoire’s complaints are valid. The Career Education Corporation has not responded to the allegations, as it is not the target of the lawsuit.

But we do know that this is not the first time such allegations have been made about Career Education, which has come under scrutiny from federal and state regulators and has faced numerous class action lawsuits by former employees, shareholders, and students over allegations that its schools engage in aggressive and misleading admissions tactics to inflate their enrollment numbers.

In fact, allegations such as these are central to a class action lawsuit filed in 2005 by former students from Lehigh Valley College, another Career Education school. That lawsuit accused the school of misleading students into thinking that the loans they were receiving “were low-interest, government-guaranteed student loans, when in reality the loans were not government-backed loans and included interest rates in excess of 15%.” Lehigh Valley, the lawsuit states, “intentionally hurried Plaintiffs through the financial aid process using aggressive sales tactics.” The Pennsylvania Attorney General has been examining the allegations.

According to a leaked Wall Street equity research firm analysis of the for-profit sector, private loans provide a whopping 22 percent of the Career Education’s revenue stream each year. In comparison, according to the report, private loans make up less than 4 percent of the revenue of Apollo Group, which is the parent corporation of the University of Phoenix.

Further, the report indicates agreements that Career Education has made with lenders such as Sallie Mae have required the for-profit higher education company to take on much of the risk of these loans defaulting because of “high levels of uncollectibility.”

Allegations that some for-profit higher education companies may be duping students into taking on high cost private loans are extremely serious. It’s bad enough that some financially needy students have no choice but to take out private loans to pay for college. But it’s unconscionable and bad business for schools to saddle students with private loan debt without making them aware of their lower-cost, federal loan options first.

When the House of Representatives turns to consideration of the Higher Education Act reauthorization in the coming weeks, it should make exhaustion of federal loans prior to private loan assumption a top policy goal.