Tuesday August 16, 2016

A year ago I predicted the creation of the Corinthian 100 would result in the formation of similar groups. It is now gaining official traction.

Today  we  also report on new government rules that allow students to sue the school if it can be shown that the school failed to provide what was promised.

As general as a degree promise actually is, that covers a wide swath of ground.

Today writer brings us up to speed on the current default status of many loans.

This article appeared in the Market Perspective Blog last weekend, it was my weekly newspaper column.

WASHINGTON –  Former and current college students calling themselves the "Corinthian 100" say they are on a debt strike and refuse to pay back their student loans.

The name comes from Corinthian Colleges Inc., which operated the for-profit Everest College, Herald College and WyoTech schools before agreeing last summer to sell or close its 100-plus campuses.

Several of the loan recipients involved with the strike are meeting Tuesday with officials from the Consumer Financial Protection Bureau.

March 31, 2015

The emergence of the Corinthian 100 heralded the bursting of the Higher Education Trillion Dollar Debt Bubble, and I said so at the time. My thinking was that once a group of students found some wiggle room to cast doubt that the education ‘contract’ had been fulfilled, others would soon find their own reasons. This would leave to an unraveling of the increasingly in default status of the entire student loan structure.

The latest U S Education Department proposal this fall will get this process underway in a hurry.   But first, let’s track how the student debt crisis has paralleled the sub-prime housing crisis of 2008.

President Carter signed legislation in the late 1970s hoping that banks would be more generous in extending loans for new homes. Everyone ought to have a home! By the 1990s ACORN was demonstrating in front of the homes of Bank Presidents insisting that what had been sound banking principles be abandoned. Previously a new home buyer had to put their own money in the form of a down payment on the home. In this wasy the buyer had a personal stake in seeing that payments were made, maintenance was down, etc, to preserve value.   But without a stake in the game, buyers could easily walk away from the obligation. And they did.

In similar fashion, the Higher Education Amendments of 1972 created three campus based programs creating student loans. This idea was expanded with the Middle Income Student Assistance Act of 1978. Naturally, universities began creating Offices of Financial Aid to show students how to obtain loans. And tuition and fees and the idea that there should be 2.5 staff members for every single faculty member began to take hold.

At least with the sub-prime mess, there was something for collateral, a home. The student loan program offers no such assurance. Worse, who would loan tens of thousands of dollars to a teenager with no credit history? And of course there is no assurance the students would complete the ‘education’ or that the student was pursuing major that would connect to a job that would allow loan re-payment. But best of all from the viewpoint of the university, they school had no liability or responsibility to make sure that happened. The student gets the debt, the school gets the money, and well, good luck on re-paying the loan.

Now back to the present. Private for profit schools soon proliferated to cash in on the game. And as with Corinthian, promises were unfulfilled. The plan would allow borrowers an ‘escape clause’ if it can be shown the student were the victims of deceptive marketing. The Department of Education estimates this could cost taxpayers $43 billion in defaults over the next decade.

Many experts, like the guy writing this column, think the tab could be much larger. Default rates are already in the double digit realm.

The new standard would require students to show they were ‘misled’ or that the schools omitted relevant information in their marketing. Hmm, like he absence of jobs for undergraduate degrees like political science ore gender studies perhaps?

Credit Suisse has already warned of a “cottage industry of attorneys poring over advertising buy colleges.”

The response by President Brian Johnson of Tuskegee University tells us a lot about the mindset of universities. Tuskegee graduates only 45% of those enrolled, and that after six years. And so the President asks ‘are we only going to take students that can graduate? The mission is important but so is survival.”

In other words, his school has to admit students it knows won’t finish just to pay the now bloated overhead, i.e, to survive.

With the Federal Government now holding most of these loans, it is hard to assess the final impact. But one thing is for sure, the schools, like the investment banks buying sub-prime mortgages, are finally going to have some skin in the game.