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Skyrocketing Private Loan Debt at Trade Schools
We have long been concerned that for-profit colleges and trade schools have been aggressively pushing financially needy students to take on high-cost private student loan debt to help cover their costs. Newly released data by the U.S. Department of Education's National Center for Education Statistics (NCES) certainly appears to bear these concerns out.
According to an analysis of the data by our friends at the Project on Student Debt, the percentage of students at proprietary institutions taking out private loans has skyrocketed in recent years, from 13 percent in 2003-04 to 42 percent in 2007-08. In other words, more than 4 in 10 students took out these expensive loans last year to attend schools that have a spotty record of retaining and graduating students.
Overall, the analysis found that for-profit college students are borrowing private loans at rates that are incredibly disproportionate to their numbers. While only 9 percent of all undergraduates attend these institutions, these students represent 27 percent of all private loan borrowers.
The data in question come from the latest edition of the National Postsecondary Student Aid Study (NPSAS), a nationwide survey of college students that the NCES conducts every four years. The survey provides the most comprehensive data available on how students and their families pay for college.
The Project on Student Debt crunched the numbers to try and get a clearer picture of how private loan borrowing has changed on our nation's campuses since the last survey was conducted in 2003-04. It found that the proportion of undergraduate students taking out private loans jumped considerably over the five year period, from 5 percent to 14 percent in 2007-08.
Meanwhile, the number of students taking out private loans without first exhausting their cheaper and safer federal student loan options is on the rise. The analysis found that the proportion of private loan borrowers who did not take out federal student loans rose to 26 percent from 22 percent in 2003-04. Fourteen percent of all private loan borrowers did not apply for federal financial aid last year, and 12 percent applied for aid but did not take out federal loans.
Private loan borrowers are not only overrepresented at proprietary schools, but at expensive private colleges as well. The data shows that students attending private colleges compose make up about 13 percent of all undergraduates, but 22 percent of those taking out private loans.
While the numbers of students taking out these loans at private colleges are troubling, we are most concerned about the rapid growth of private loan borrowing at for-profit colleges and trade schools because these institutions have such a poor record of graduating students. According to a study conducted last year by Mark Schneider, the Department's Commissioner of Education Statistics from 2005 to 2008, for-profit schools have "the lowest median graduation rate" of any sector at 38 percent. This figure "is almost twenty points lower than their private nonprofit counterparts and seven points lower than public institutions," including community colleges, Schneider wrote. The median rate at for-profit schools drops to less than 25 percent when counting only black students.
In addition, Schneider found that about half of proprietary school students attend institutions that graduate less than one-third of their students, compared to "around 10 percent in both private nonprofit institutions and public universities." And while more than 30 percent of black students attend colleges that graduate less than one-third of their black students, the percentages jumps to more than 60 percent at proprietary institutions.
At Higher Ed Watch, we have often warned of the hazards of private loans, particularly for students attending questionable for-profit trade schools. Private loans almost always have worse terms than federal loans, and lack important safeguards. In addition, they offer far fewer options for borrowers in repayment.
The latest NPSAS data should set off alarms about the untenable position we're putting many financially needy students in -- loading them up with high-risk debt to attend schools that are more likely than not to leave them stranded. Hopefully, these alarms will no longer go unheard.
[Disclosure: Higher Ed Watch receives support from the Institute for College Access and Success, which runs the Project on Student Debt.]
Disclosure
Interesting disclosure...I wonder why this wasn't mentioned at your event on student loans a few weeks ago. Given Mr. Shireman's role there, and his claim that the event was an "open forum" on reform ideas, it seems like it would have been appropriate to mention it.
Response to Transparency Fan
At the time of the event we were not funded by TICAS. Since the event, we have received a small grant from the Institute to help support our ongoing work, and disclosed it above as we have in similar circumstances in the past. The event in March was a joint effort of two initiatives under the Education Policy umbrella, Higher Ed Watch and the Federal Education Budget Project. It was funded by the Gates and Hewlett Foundations.
Correcting the Record
In “Skyrocketing Private Loan Debt at Trade Schools,” Mr. Burd questions whether financially in-need students should be taking out private loans to attend private career colleges and charges that career colleges are pushing the use of such loans.
We agree that postsecondary students requiring financial aid, regardless of college or university selected, should exhaust federal sources before considering private loan sources. CCA has been among the strongest proponents of increasing Federal grants and loans so that students do not need to take private loans at all. We congratulate Congress on the increases that were enacted in 2007-08, and hope, with President Obama’s strong encouragement, we will see further increases this year and in subsequent years.
We agree that colleges or universities should not encourage students to pursue private loans en lieu of federal loans.
We believe that lending amounts should be calculated based on the cost of tuition, books and fees, and reasonable living expenses, when necessary, keeping student loans focused on education and making loan repayments more manageable. We support allowing financial aid officers to limit in a transparent manner by program cost or potential earning capacity the ability of a student to borrow beyond a certain level.
We note that until recently, in addition to charging higher rates, private lenders offered a range of value added services to students, including loan origination discounts, expedited processing, repayment counseling, and related offerings. Not every borrower needs these services, but they were of benefit to many.
We observe that Mr. Burd is welcome to his own opinion, but not his own facts.
The facts show the following:
Between the 2003-04 and 2007-08 academic years, federal aid for higher education was essentially flat (Table 1, “Trends in Student Aid, 2008,” College Board), while the average cost of tuition and fees at all institutions increased substantially – 33 percent for private four-year, 42 percent for public four-year and 26 percent for public two-year institutions;
The household income for American families grew at only an average of 1.5 percent, making paying for college from savings an unlikely proposition for all but the most affluent. (Table H-6, Historical Income Tables, Households, U.S. Census Bureau) Not surprisingly, private lenders became a viable alternative for closing the gap on college costs;
Until the private lending market collapsed last year, private lenders served students at public universities, private not-for-profit colleges, and career colleges. The percentage of students at career colleges using private loans is higher than those at not-for-profit private colleges -- 27 vs. 22 percent. (Project on Student Debt) Why should this be surprising? Career colleges serve a less affluent population. Lower income students are more likely to face larger gaps in paying for college. Low income Americans are otherwise vastly underrepresented in other sectors of postsecondary education, with only 11 percent of those in the bottom quartile attaining a college degree (“Getting Ahead or Losing Ground: Economic Mobility in American,” The Brookings Institution, February 2008). In addition, a high percentage of students at career colleges are non-traditional, which means they are older, and thus often not eligible for PLUS loans, as traditional students are when they need to fund the “gap” between the standard Federal aid programs and the costs of school. If these older students were made eligible for PLUS loans, they would not turn to private loans.
Mr. Burd all but accuses for-profit colleges and trade schools of “aggressively pushing financially needy students” to sign up for high priced private loans, as if increases in private loans were unique to our sector. There was actually a threefold increase in the percentage of students taking out private loans between 2003-04 to 2007-08 in all sectors of higher education, including public and private non-profit institutions ;
While Mr. Burd states that career colleges have a poor record of graduating students, just the opposite is true. Looking across all types of market-funded institutions, career colleges graduate students at a total rate of 62 percent—far above the 38 percent rate cited.
Whether or not the private student lending marketplace ever recovers is a matter that remains to be seen. The working reality for career college students, largely low income and working class adults with modest FICO scores and few well to do friends or family to co-sign loans, is that private borrowing is no longer an option anyway. The number of private student loan lenders still making such loans has dropped dramatically, and the remaining few are lending only to those with stellar credit. The federal government has stepped into the breach in part, increasing Pell Grants and Stafford borrowing ceilings. For many would be private borrowers, the gap has narrowed, but much remains to be done. We hope that Congress will raise the Stafford unsubsidized loan limit again in the near future and adopt the President’s recommendation to increase Pell grants. We also look forward to working with the Administration and the Congress on the new Perkins program that the President has recommended in his budget.
Debt eating away at our young
Re:Skyrocketing Private Loan Debt at Trade Schools
It is upsetting to learn that we encourage young people to go to school and "make something of themselves" and when they make the effort and go to school they are being set up for failure. The same programs at these proprietary schools are probably offered at the local community college for a fraction of the costs with higher graduation/program completion rates.
How can we protect others from falling into this trap?
This is unnecessary debt. Debt is eating our young before they get the chance to live.
wrong focus
Ridley:
Your focus on education debt as an evil culprit is misplaced. How about some ire directed at other forms of non-appreciable consumer debt, i.e., credit cards, cable television, cell phone/text companies, and revolving consumer credit such as offered by Best Buy, Nordstrom, etc. New college graduates are barraged with abundant low-cost consumer credit that seemingly allows them to live a lifestyle that in reality is beyond their means. Then when they default on student loans somehow schools and lenders are the bad guys. How about some anger toward Capital One for a change? FCS, schools sell rights to put credit card applications in college bookstore, cafeteria, etc. That is OK, but marketing a low-interest FFELP loan with borrower benefits is somehow evil?
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