How For-Profit Colleges Use Student Loans to Scam Students

This article mirrors an article that I posted in the Scholarship Watch blog entitled Student Loan Scams by For-Profit Colleges. I have re-printed the article below in its entirety. The article may be quoted or referenced, but no part of the content should be duplicated, copied, or plagiarize without my express permission.

According to a recent study by USA Today, more than 260 public, private, and for-profit colleges and universities in 40 states, the District of Columbia and Puerto Rico have students who have taken out student loans to complete their college education. The majority of these students taking out high-interest loans, however, attend a for-profit college.

As traditonal public universities increase their admission's requirements, and increase their tuition, and as the competition for the best students also increase, thousands of students are seeking the alternatives offered by for-profit colleges. Emboldened by the success of their parents, and even strong-armed to obtain a college education, thousands of students each year enroll into either a public, private, or for-profit college.

For students unable to attend a traditional Division I, NCAA, public university, either because of a lack of stellar academic performance in high-school, or lack of income, then attending a for-profit college is a final, last gasp, alternative unless they wish to pursue a community college.

Statistics indicate that the costs of attending a for-profit college are much higher than attending a public institution. This should be no surpise for any person with an ounce of common sense. Remember: the dominate purpose of a for-profit college is to make a profit first, and perhaps to educate second. Regardless of the ability of the student to pay back the student loan, the foremost object of the for-profit college is to produce a profit at all costs, and obtain enrollment and/or tuition monies along the way.

Aggressive Recruitment Strategy of for-Profit Colleges includes Scam Student Loans with High-Interest Rates

Unlike public and private colleges, and universities that receive annual donations, gifts, and endowment funds from succesful alumni, for-profit colleges rarely have a roster of economically successful graduates that are capable or willing to shell out thousands of dollars in annual donations.

For-profit colleges rely upon clever and extremely aggressive recruitment strategies that range from Internet marketing, business suits, recruitment seminars, cold-calls, recruitment strategies disguised as job fairs, colorful brochures, and easy to obtain high-interest rate student loans.

"These colleges should set off a red flag in the minds of prospective student borrowers — and their parents," says Andrew Gillen, research director for Education Sector, a non-profit, non-partisan think-tank on education policy that gathered the federal data.

Guidance counselors, and financial-aid administrators at for-profit colleges do not have a professional obligation to advise students of alternative financial-aid options like private scholarships, scholarships sponsored by National Academy of American Scholars, federal grants, or unclaimed financial-aid.

Instead of promoting, encouraging, or sharing low-cost or free financial-aid options such as those sponsored by National Academy of American Scholars, it is typical for for-profit colleges to employ numerous recruiters that operate on commission-only basis to sign-up students. Once signed-up, the next pitch is in-house scam student loans that carry a high interest rate, and which the recruiter knows full well the student is unable to pay back.

A Scam Student-Loan Compared to a Pay-Day loan

A scam student loan is issued to an unsuspecting student when the student decides he/she needs financial-aid to pursue or continue a college education. A scam student-loan has essentially the same characteristics as a pay-day loan except that the student's immediate paycheck is not attached to the student loan, and the student-loan need not be paid back within 10 days or by the next paycheck. With a pay-day loan, state and federal laws varies, but many local laws require the borrower to demonstrate an ability to re-pay the loan. With a scam student-loan, however, the for-profit college recruiter can pencil in any amount and stamp DEBT-DUE without any income supporting documents. Consquently, the default rate for student loans at for-profit colleges are so high.

A Senate investigation in 2012, last summer, found that students at for-profit colleges on average had lower graduation rates and higher default student loan rates than those enrolled in non-profit institutions. Again, this figure should not be surprising given the central objective of for-profit colleges. For-profit colleges use the same sratgey used by most for-profit businesses: maximize profit and minimze expenses. Graduation is an expense for a for-profit-college, and necessarily a business goal.

Likewise, a USA TODAY analysis of student loans found 117 for-profit institutions had default rates that where were higher than graduation rates, with most offering four-year degrees or higher. ITT Educational Services, which has 145 technical institutes nationwide, operated at least 38.4% (45) of the student-loan default schools.

The analysis found 88 community colleges where default rates were higher than graduation rates, though fewer of those students borrow and their loans are smaller on average.

Fuel Behind the $1 trillion dollar Student Loan Debt

In 2010 student-loan debt exceeded credit-card debt for the first time. In 2011 it surpassed auto loans. In March of 2012, both the Wall Street Journal and the Consumer Financial Protection Bureau, announced that student loan debt had passed $1 trillion. It grew by $300 billion from the third quarter of 2008 even as other forms of debt shrank by $1.6 trillion, according to a separate tabulation by the Federal Reserve Bank of New York.

It is typical that for-profit colleges' student-loan defaults were about twice as high as among the alumni of public colleges, and three times the level of non-profit alumni -- according to the government numbers on those who started repayment in 2007. More worrisome, the Education Department says defaults of the for-profits' students get much worse over time, rising above 23% of individual loans after four years, compared with 10% for public college alumni and 7% for nonprofit alums.

In a snapshot, the fuel for rising student loan debt matches the spectacular growth of for-profit colleges. ITT-Tech, University of Phoenix, Kaplan Colleges, and the entire for-profit college sector has experienced extreme hyper-growth and sky-rocketing enrollment. a key ingredienat of their success relies upon student loans. For example, Trade-school students take out more loans than their community college peers; 97% of them borrow, compared with just 13% at community colleges.

However, these same Trade-School students have a statistical default rate on their student loans that is twice the rate of their non-profit peers. With more than 140 locations, ITT Technical Institute charges among the highest tuition in its industry. It also has the industry's highest rate of student loans that go into default within just two-years of attendance. Those high tuition charges yield robust profits, and is considered normal for the for-profit college sector.

I have documented these factors that have helped fuel rising student loan debt:

1. The growth of for-profit colleges, and annual increase of the quantity of for-profit colleges nationwide, and weak regulatory controls that fail to dictate ethical paramters as to who and how they market their services to;
2. The unchecked marketing prowesss of for-profit colleges that has yielded more student enrollment, and associated student loan debt;
3. A surge in Americans going to college in recent years to escape a bleak labor market;
4. Natural statistical increase in women and moms attending college;
5. Colleges and universities that are members of National Association of Student Financial-Aid Administrators (NASFAA) appear to have a lock-step policy of annual tuition increases;
6. State funding for education has decreased in many states and this has resulted in the need to take out student loans;
7. As the housing market recession took hold, and interest rates dipped to record lows, more and more students, moms, and women sought to refinance their high-interest student loan debts since the high interst student loan debt instruments led to a dramatic incease in student borrowers falling behind on payments;
8. Federal funding incentives provided to for-profit colleges that induce for-profit colleges to provide speculative student loans to students;
9. The apparent lack of cooperation from teachers and educators in promoting, or sharing resourceful information on private sources of scholarships, grants, and financial-aid.

Alternatives to High-Interest Student Loans

A great alternative to high-interest student loans is low-interest student loans, debt-forgiveness programs, or the 0% interest student loans sponsored by National Academy of American Scholars. Student-loans are a fundamentally acceptable option for any financial-aid package. Student loans sposnored by National Academy of American Scholars are pre-screened end help ensure that moms, students, and working adults are offered the best options.