As scrutiny of for-profit institutions increases, direct private loans from those institutions to students are becoming rarer. One reason is that states have joined federal agencies in scrutinizing the sector over its lending, recruitment and advertising practices.
Take the Minnesota attorney general's attempt to crack down on Globe University. Attorney General Lori Swanson charged the university with violating state law and making unlicensed loans with interest rates as high as 18 percent.
Globe offered a private loan directly to students, calling it the Educational Opportunities and Student Access loan. The state received complaints about the program and amended an ongoing lawsuit to add allegations of unlicensed lending and usury charges.
“Most public companies used to do this. Corinthian [College] had a few iterations… another was I.T.T. Education [Services]. Those were the most aggressive in loaning money,” said Jeff Silber, a college-sector analyst with B.M.O. Capital Markets Group.
Corinthian’s Genesis loan drew the ire of the Consumer Financial Protection Bureau (C.F.P.B.), which filed a lawsuit last year over the company's allegedly predatory private loans. The C.F.P.B. has led the way in aggressively pursuing for-profits about possible predatory lending.
The for-profit industry's private loan programs are often connected to the U.S. Department of Education's so-called 90/10 threshold, which caps operating revenue at 90 percent from federal sources. Companies had to find the other 10 percent of revenue elsewhere, so some turned to students, who often don't have the extra dollars, Silber said.
The C.F.P.B. sued Corinthian for raising tuition prices so students would max out their federal loans and grants and have to make up the balance through private loans. The agency charged I.T.T. similarly, due to the institute's Temporary Credit loan, which had to be paid in full by the end of a student's academic year. However, in the lawsuit against that company last year, the C.F.P.B. stated I.T.T. was aware students would not be able to pay back the funds filling the tuition gap. Corinthian denied the allegations. I.T.T. called the complaint "unfounded" and stated that the loans were made by a third party.
Direct, private loans from for-profit institutions to students can be risky for colleges, Silber said, adding that institutions don’t want to put their own balance sheets at risk and, as a result, some view it as a segment of the industry that is best left to banks. These days very few public companies offer private loans and if they do they're limited, he said.
The demographics of students at for-profits also make them inherently risky borrowers, Silber said.
“Generally these types of students have a tough time getting financing,” he said.
States Apply Pressure
Since 2011, Kentucky Attorney General Jack Conway has fought for-profit colleges on their practices. He's since been joined by 37 other states in efforts to hold those institutions accountable, said Allison Martin, communications director with the attorney general's office.
State investigations of several large for-profits are ongoing, including I.T.T. Tech, Education Management Corporation and Career Education Corporation, Martin said in an email.
Activists who oppose what they see as practices that hurt students are happy to see states and attorneys general pursuing these investigations against for-profits. Minnesota joins a list that includes Kentucky, New York and California in suing for-profits for deceptive consumer practices.
Maggie Thompson, a campaign manager for Higher Ed Not Debt, an organization that tackles American student loan debt, calls for-profits' defense of why they offer private loans "disingenuous."
"The reason students need loans on top of federal aid is because [for-profit schools' tuition is] astronomically expensive in the first place, especially when compared to community colleges,” she said.
It's false to compare for-profit tuition prices to community colleges because only one is heavily subsidized by taxpayers, said Nicole Elam, vice president of government relations and external affairs for I.T.T., referring to community colleges.
At the height of the financial crisis, students had trouble getting financing to cover their college expenses, which was where for-profits like I.T.T. stepped in to help fill the tuition gap, Elam said. (Note: This paragraph has been changed from a previous version to clarify the function of ITT's loan program.)
Every tool the attorneys general find in their states to protect consumers and weed out the bad for-profit actors is helping the whole system, said David Bergeron, vice president of postsecondary education for the Center for American Progress.
“The institutions serving students well and helping students get good jobs so they’re able to pay their bills -- those institutions aren’t going to need those loans or engage in abusive practices with students,” Bergeron said. “It’s the end of the abuse of for-profit schools."
But not all states are pushing for further for-profit enforcement. Wisconsin Governor Scott Walker wants to eliminate the Wisconsin Educational Approval Board, which oversees for-profits. Although the board doesn't directly oversee for-profit lending, it works with agencies in the state that do.
"We're going in the opposite direction of other states," said David Dies, executive secretary for the E.A.B. "We'd be the only state without some kind of evaluative process for these institutions."
Meanwhile, some for-profits are trying to improve their reputations after years of bad publicity, while also responding to pressure from the Obama administration and state attorneys general.
"You go back a few years and you would have never seen for-profit schools giving trial enrollment periods to students so they can see if they're ready for an academic program they're thinking of going into or whether or not they'll find it of sufficient quality," Bergeron said. "Now it's very commonplace."
Bergeron said he applauds more enforcement and regulation in the for-profit sector, especially when it’s based on something that can be effectively measured like promissory notes.
Which should also be good news for for-profit colleges who don’t want to compete against bad actors, he said.