Kollege Kockup: Something Is Not Right In Higher Ed

As the U.S. economy's other vital systems continue to shut down, the college diploma system still seems to be going strong. But a closer look indicates that higher ed may be heading into its final series of convulsions.

Student loan defaults are up. Graduate performance in the job market is down. Bankrupt states are unable to keep public university employees in the style to which they've grown accustomed. Harvard's endowment got wiped out by future White House economic advisor Larry Summers.

Yet for-profit colleges are booming, and their students are pulling down ever greater sums in federal grants and guaranteed loans.

They're also defaulting on their loans at greater rates than students at other colleges. Per the most recent Trends in Student Aid report [pdf] from the College Board:

Among students who earned bachelor's degrees at public four-year colleges and universities in 2007-08, 38% graduated with no education debt and 6% graduated with debt greater than $40,000. Among those who earned their bachelor's degrees at for-profit institutions, only 4% had no education debt, while 24% had borrowed $40,000 or more.

This report by Anne Ryman of the Arizona Republic gives some more detail:

Tuition at for-profit schools can easily top $10,000 a year. The average loans for a student who earned a bachelor's degree totaled $32,650 in the 2007-08 school year, compared with $17,700 at public universities. At community colleges, the average for two-year degrees was $7,125.

At least nine out of 10 students who earn degrees or certificates at for-profit schools borrow money to attend, a higher ratio than four years earlier and more than at universities or community colleges.

Nationally, for-profit schools had the highest share of defaults in the United States in 2007: 11 percent. Community colleges had a nearly 10 percent rate, and private, non-profit universities had the lowest rates, at 3.7 percent, according to the U.S. Department of Education.

Bloomberg's Daniel Golden reports on how for-profit schools stand to gain greater access to federal education subsidies by purchasing accredited schools:

The nation's for-profit higher education companies have tripled enrollment to 1.4 million students and revenue to $26 billion in the past decade, in part through the recruitment of low-income students and active-duty military. Now they're taking a new tack in their quest to expand. By exploiting loopholes in government regulation and an accreditation system that wasn't designed to evaluate for-profit takeovers, they're acquiring struggling nonprofit and religious colleges—and their coveted accreditation. Typically, the goal is to transform the schools into online behemoths at taxpayer expense.

For-profit education companies, including ITT Educational Services, based in Carmel, Indiana, and Laureate Education Inc., in Baltimore, have purchased at least 16 nonprofit colleges with regional accreditation since 2004, according to corporate announcements and filings with the U.S. Securities and Exchange Commission. Jack Welch, the former chief executive of General Electric Co., and Michael Milken, the U.S. junk bond pioneer, have invested in for-profit companies that bought or formed partnerships with nonprofit, regionally accredited schools.

While Golden and Ryman both take a dim view of the stunning success of for-profit colleges since the 1990s, the rise of the for-profits is essentially a positive trend. It's a good bet that ITT will be better able to manage the moribund Daniel Webster University than was the previous management, and that San Francisco's Heald College will be healthier as part of Corinthian Colleges Inc. than it was as a struggling business school. And if the for-profits' infiltration into the accredited schools market causes the public to be more skeptical of the accreditation cartel, well, as Voltaire said to Benjamin Franklin, "Thank Jeebus H. Christ for small mercies."

But the combination of defaulting loans and rapid growth suggests two things:

* The "higher education bubble" identified last year by Joseph Cronin and Howard Horton is a real phenomenon.

* The higher education bubble is even more inflated than it was a year ago.

What does this mean for students, those woeful, debt-crushed lambkins who just need another bailout? Secretary of Education Arne Duncan makes the case for replacing the federal government's convoluted system of guaranteeing loans made by private lenders with a program of direct lending. Predictably, Sallie Mae, the massive former GSE in charge of managing more than $180 billion in student debt, objects to that change. Tellingly, both sides cite saving and creating jobs—rather than, say, making sure credit-worthy students get supportable loans for reasonable tuitions—among their respective goals.

The move to direct federal lending would be a marginal improvement in a diseased system. It's also an idea that dates back at least 15 years, to a time when the class of 2014 was not yet old enough for kindergarten. Like President Obama's $100 million college prep program, it's a big nothing disguised as government benevolence.

In the meantime, student borrowing has more than doubled since the beginning of the 21st century. And as the rising rate of defaults indicates, borrowers are not making twice as much as new graduates were making ten years ago. There is too much money going into this asset, not enough value coming out, and a massive taxpayer liability for the difference.

This problem won't be solved with more of the medicine that caused it. Last week's protests against tuition hikes at various state universities were wrong about the cause of and the cure for the disease (dig this CNN column by an art history Ph.D. candidate, which will actually fall short of your expectations for economic literacy among art historians), but they're right about one of the symptoms: Tuition and board have been massively inflated. And as this reason.tv video on Pell Grants demonstrates, Uncle Sam is the inflationist in chief: