Student Loans May Trigger Next Financial Meltdown

Assistant Senate Majority Leader Dick Durbin (D-IL) warns the U.S. could face a national crisis in higher education, akin to the subprime mortgage meltdown, if Congress fails to regulate loans given to students at for-profit universities.

Right now a growing number of for-profit schools are “raking in huge amounts of federal dollars while leaving students poorly trained and over their heads in debt,” Durbin argued in a recent speech before the National Press Club.

“The goal seems to be to bring in as many students as possible - regardless of their ability to succeed or graduate - load them up with loans, and leave taxpayers on the hook if students default,” Durbin said.

Steve Eisman, the outspoken money manager who is known for predicting the subprime meltdown, has offered his take on the for-profit college controversy in a presentation entitled “Subprime Goes to College” at the Ira Sohn conference, an annual hedge fund meeting.

Eisman’s views were also featured in an Op-ed in the New York Post in which he states, “The for-profit industry has grown at an extreme and unusual rate, driven by easy access to government sponsored debt in the form of Title IV student loans, where the credit is guaranteed by the government. Thus, the government, the students and the taxpayer bear all the risk, and the for-profit industry reaps all the rewards.”

Students at for-profit colleges comprise only 7% of those pursuing higher education, but 44% of those defaulting on federal student loans, Durbin said, citing statistics from the Department of Education.

Meanwhile, the struggling economy is putting more pressure on financial aid budgets as families struggle financially. The College Board reports that student borrowing continues to increase, along with the gap between available resources and the overall cost of attending college. The group notes that tuition at for-profit schools is twice as high as public four-year colleges and about five times higher than community colleges.

As of 2009 however, for-profit colleges claimed nearly 25% of the $89 billion of federal Title IV student loans and grant disbursements, although they had less than 10% of enrolled students, according to Eisman. At that pace of growth, for-profit schools could draw 40% of all Title IV aid in just 10 years.

Already, federal Title IV loan and grant dollars comprise close to 90% of total revenues at many major-for profit institutions - growth that has resulted in spectacular profits and soaring executive salaries, notes Eisman.

Sen. Durbin is pushing the Obama Administration and Congress to address the for-profit education industry by revising the “90/10 rule” which stipulates that profit-seeking colleges must obtain 10% of their revenue from non-federal aid sources.

Sen. Durbin also suggests that limits be set on the amount money schools dependent on federal financial aid could spend on marketing and advertising. He is also calling on Congress to address the regulation of private loans as well as concerns about schools buying accreditation.

The Department of Education is also considering a “Gainful Employment” rule that would cap student debt, forcing universities to lower tuition, or face declining enrollment because fewer students could afford to pay it.