Student Loans

Is the Student Loan Bubble Starting to Pop?

For-profit colleges close after feds turn off easy loan spigot


Have we heard the first pop in a bursting student-loan bubble? After Santa Ana, California-based Corinthian Colleges this month filed for bankruptcy and announced the closure of its remaining for-profit college campuses, talk in Congress and the Legislature has revolved around proposals to bail out student debt for as many as 16,000 students.

Financial analysts have for years warned about the parallels between easy student loan debt and the easy mortgages that led to anartificially inflated housing market in the mid-2000s, and the resulting price drops and foreclosure bonanza. Maybe it's time to reignite those discussions.

"Corinthian's meltdown began last year after the U.S. Education Department reduced its access to federal student aid," reported Bloomberg News. It sold half of its 107 campuses "amid allegations that it falsified grades, attendance and job-placement rates." The company denies allegations and blames state attorneys general — including California's — for legal action that made it tough to sell the other campuses.

Under federal loan rules, some students may be eligible for loan forgiveness — at a possible cost of more than $200 million to taxpayers. But the attorneys general, some U.S. senators and a group of protesting Corinthian students dubbed the "Corinthian 100" are pushing for a broader loan-forgiveness package that could cost as much as $1.5 billion.

Democratic and Republican leaders of the California Assembly in late April announced legislation that would waive community college fees for these students, provide them with legal assistance, offer "tuition recovery" to many online students, and create a "Closed Schools Task Force" to help them get back on their feet.

Some critics blame the for-profit nature of these colleges, but in other parts of the country some for-profit colleges are simply turning themselves into nonprofit colleges — and that allows them to get an even higher percentage of their revenues from the government (100 percent rather than 90 percent, according to a Miami Herald report).

The basic allegations: Many schools would use the hard sell to sign up students — often lower-income people, minorities, veterans and vulnerable people — and make dubious promises. The students would be in debt for iffy degrees, and the schools would rake in billions in profits.

No question, the students in the Corinthian situation in particular are left in a bad situation. Their credits are not easily transferable and they are stuck with questionable or unfinished degrees. But loan forgiveness could create a wave of bailouts that ripples across the nation's educational system. Economist Richard Vedder argued in The New York Times that such a policy only "encourages students to borrow excessively, thinking they will not have to repay loans."

If bailouts are problematic, what are other solutions? Some critics want tougher standards for the accreditation agencies. (That, too, offers echoes of the housing bubble given allegations that rating agencies failed to adequately warn about the condition of some of the nation's mortgage lenders.)

Others blame federal education officials for taking so long to clamp down on Corinthian. The problem might even work itself out. Money/CNN reported that enrollment at the University of Phoenix, the nation's largest for-profit college chain, dropped by more than 50 percent in the last five years amid bad press about for-profit colleges.

President Barack Obama argues community colleges, the obvious alternative for students pursuing career training, should offer free tuition to pick up the slack. But one reason for past growth in for-profit career colleges is community colleges are priced so low they are overrun with students, who often cannot get classes they need in a reasonable time.

These ideas miss the core problem. Corinthian collapsed after federal officials turned off the loan spigot, given that its business model was based on free-flowing federal loan money. Even the nation's most prestigious university systems are ultimately funded by student loan debt, which may be why many of them have massive bureaucracies.

Debt-related problems have emerged first at these controversial for-profit institutions, but how long before a deflating loan bubble affects the nation's entire higher-education system?