The Career College Association’s Misleading Arguments

Last week, we argued that Sallie Mae’s decision to stop engaging in subprime student lending at some of the most scandal-ridden chains of for-profit colleges is good news for low income and working class students, not bad. Disadvantaged students with poor credit ratings should never have been stuck with high-cost private student loans, particularly ones with interest rates and fees exceeding 20 percent.

[slideshow]The Career College Association, which lobbies on behalf of these proprietary school chains, disagrees with our assessment. The group’s leaders say the move by Sallie Mae and some other lenders to stop providing subprime loans to high-risk students at the schools it represents will “foreclose access to higher education for thousands of borrowers.”

“Our member institutions tell us that many lenders have stopped subprime student lending and may stop private lending altogether,” Harris Miller, the association’s president, wrote in a news release. “Their retreat may leave many students unable to finance the balance of their educations.”

To avoid a “crisis” that will jeopardize “the last, best chance of many students to earn a college degree,” Miller argues that lawmakers should, among other things, consider reversing some of cuts Congress made last fall to the subsidies that lenders receive for participating in the Federal Family Education Loan (FFEL) program. He also calls on legislators to back off their attempts to eliminate the types of sweetheart deals between colleges and FFEL lenders that have caused so much controversy over the last year.

We are confident that Congressional leaders will ignore such misguided advice. But just in case they waver, we’d like to offer our responses to some of the group’s most outlandish claims:

Congressional subsidy cuts caused a “crisis”

False. Sallie Mae decided to stop offering subprime private loans to students at poorly performing trade schools because the financially-struggling loan giant has been taking huge losses on those loans. Unlike the case in FFEL, the federal government does not insure private loans, nor guarantee their profitability. Sallie Mae is on the hook when borrowers default on these loans. And by all accounts, defaults on subprime loans are growing alarmingly.

Truth be told, Sallie Mae took a huge gamble in making these risky loans in the first place. The company appears to have viewed these loans as a “loss leader,” meaning that it was willing to have a large number of private loans go into default in exchange for becoming the exclusive provider of federal and private loans for the tens of thousands of financially-needy students that these huge chains of for-profit trade schools serve. Now Sallie Mae is paying the price for its gamble and predatory practices — spending hundreds of millions of dollars to cover losses on bad loans should never have made and have burdened many, many borrowers.

Student loans are drying up at for-profit colleges

Mostly false. Students who attend for-profit trade schools that participate in the federal financial aid programs are in absolutely no danger of losing access to government-backed student loans. As of now, Sallie Mae has said that it will stop providing subprime private loans to students at trade schools. But even if Sallie Mae and every other FFEL lender refuse to serve these students, nothing is stopping these schools from entering the federal Direct Loan program. One of the major advantages of direct lending, which is run by the Department of Education, is that it does not engage in redlining.

As for maintaining access to private loans, only those chains of for profit schools that routinely pushed high-risk students to take out subprime loans — such as Career Education Corporation and Corinthian Colleges — appear to be in trouble. More respectable chains like Devry Inc. pretty much shrugged off the news, because only a small proportion of its students received subprime loans.

Students’ access to college is threatened

False. Low-income and high-risk students do not have to rely on private loans to go to college. Between federal student loans, which are universally available, and federal grant aid, over a thousand state and community colleges are within reach. Tightened credit markets will cause some low-income students to reconsider where and how much they’ll pay to pursue a postsecondary education but will not in a widespread way impact their decision to pursue a postsecondary education because of the availability of federal aid and of low-cost public colleges.

If low-income, high risk students attend a trade school with the help of an expensive private loan and then drop out, they will be in very, very bad shape — saddled with debt and with little in the way of a quality post-secondary education. Not all trade schools are of low quality, but students should be especially careful when choosing an institution in this sector and assuming an expensive private student loan in furtherance of their post-secondary education plans.

We cannot emphasize enough that if students have no other choice but to borrow private loans to attend for-profit colleges, then they can and should consider seeking training at more affordable schools, such as community colleges.

Bottom Line:

As policymakers, journalists, and others evaluate the Career College Association’s arguments, they should keep in mind that the group’s ultimate goal is to protect the profitability of its member institutions, whether or not they are helping or hurting students.