For-Profit Colleges

Student Loan Credit Crunch Bill Sent to President

One in Five Colleges Considering Switch to Direct Lending

Tuition On the Rise, but Spending for Instruction is Not

Report Calls for Revised Pell Grant Formula

If you want to know the dangers of taking out private student loans, just ask the 2,500 students who were, until early this year, enrolled at flight academies across the country owned by Silver State Helicopters.

As recounted by The San Diego Union-Tribune, these students were "left in the lurch" when the Nevada-based company, without warning, shut its doors on Super Bowl Sunday and filed for bankruptcy liquidation. Because the schools did not have the proper accreditation to qualify to participate in the federal student aid programs, the company directed students to take out high-cost private student loans to cover the $70,000 tuition that they were required to pay up front. Unfortunately, these students may be stuck repaying these loans for training they did not ultimately receive.

Democrats Introduce Bills Aimed At Easing Student Loan Credit Crunch

Students at Canadian Career Colleges Have More Loans, More Defaults

Dept. of Ed Issues Guidelines on Lender-of-Last Resort

Last week, we wrote that Sallie Mae and its promoters on Wall Street claim the company was "blind-sided" by the rising default and delinquency rates on subprime private loans it made to low-income and working class students at poor performing higher education trade schools. It's a convenient argument considering that the loan giant is facing at least one, and possibly several, class action lawsuits by angry shareholders who accuse the company of deliberately misleading them about the amount of risk it was assuming. But the argument is disingenuous at best.

Financial analysts have long raised red flags about Sallie Mae's private lending practices. During earnings calls and at shareholder meetings and investment conferences, analysts regularly peppered Sallie Mae officials with questions about whether the company, which is used to having government backing on its loans, had the expertise needed to assess the risks associated with lending unsecured, private loan debt to financially-needy students.

Of particular concern to these analysts have been the sweetheart deals that Sallie Mae forged with some of the most scandal-ridden chains of for-profit colleges, such as Career Education Corporation and Corinthian Colleges. Under these Orwellian-sounding "opportunity pool" or "recourse loan" arrangements, Sallie Mae agreed to provide funds for private student loans, with interest rates and fees totaling more than 20 percent per year, to financially-needy students who normally wouldn't qualify for them because of their subprime credit scores. Sallie Mae apparently viewed these loans as "loss leaders," meaning that the company was willing to make these loans, many of which were likely to go into default, in exchange for becoming the exclusive provider of federal and private loans for the tens of thousands of subprime and non-subprime students these huge chains serve.

Sallie Mae is facing a potential series of class action lawsuits from angry investors who believe the student loan giant misled them about the amount of risk the company was taking on in pushing high-cost private loans on subprime borrowers attending poor-performing trade schools.

Sallie Mae is already facing at least one class action lawsuit filed by shareholders in the Federal District Court in Southern New York, and company officials have alerted the Securities & Exchange Commission that they expect "similar actions" to be filed elsewhere shortly. The pending New York lawsuit accuses Sallie Mae of failing to "engage in proper due diligence" before providing private loans to high-risk students at for-profit, trade schools; of deliberately not putting enough money in reserve to cover anticipated losses on "uncollectible loans" in order to artificially boost earnings; and of making "false and misleading statements" to shareholders about the overall quality of its private loan portfolio to keep its stock price high.

Officials at Sallie Mae have not yet filed a formal response to these claims. But actions that the loan giant has taken recently appear to boost the shareholders' case. In January, the company, reeling from the news that it was spending hundreds of millions of dollars to cover losses on bad loans, announced that it would no longer engage in subprime lending at trade schools. "Sallie Mae has lent too much money to students who have gone to schools without very good graduation rates," Al Lord, the company's Chief Executive Officer, said at the time. In court, that's called a statement against interest.

The Los Angeles Times recently provided a disturbing example of how some for-profit trade schools like Corinthian Colleges have been pushing subprime, high-risk students to assume heavy levels of debt that they may never be able to repay. In an article on the credit crunch, the LA Times quoted a 20 year old student, with a 10 month old baby, who is taking classes at Everest College in West Los Angeles to become a medical assistant. To pay for an eight week course at the Corinthian-owned school, this student has had to take out an $8,000 private loan with an 8 percent interest rate. The student, and several friends with similar loans, told the newspaper "that they knew that repayment would be difficult on the $9 an hour or so they expected to earn if they got jobs." The course, they said, gave them "75% to 90% of what they need to get and keep a job."

Pennsylvania Attorney General Tom Corbett's decision last week to reach a $200,000 settlement agreement with the for-profit trade school chain Career Education Corporation over allegations that one of its schools had duped students into taking high-cost private student loans has come under withering criticism. At Higher Ed Watch, we believe that criticism is well deserved, as the settlement provides no relief for the former students who appear to have been misled into taking out expensive private student loans, and will do nothing to protect students at the scandal-ridden chain's other colleges who may be falling victim to similar deceptive practices.

Two weeks ago, we wrote in favor of a proposal to change how student loan defaults are calculated for the purposes of college accountability. We argued that lengthening the timeframe the government uses to measure student loan defaults could bolster everyone's ability to judge the quality of education offered by different institutions of higher education. Unfortunately, the House of Representatives seems to have caved to pressure from the trade school industry in particular and significantly weakened the proposal in ways that make it less useful. Today, we take a look at the good, the bad, and the ugly of the House's action.

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."

Policymakers and journalists, don't be fooled by the Career College Association's spin. Sallie Mae's decision last week 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.