Drowning in Debt: The Emerging Student Loan Crisis

A growing number of low-income minority students who go to
for-profit colleges are taking out and defaulting on private student
loans, which offer the least repayment flexibility at the highest
interest rates, according to a new study.

The report, Drowning in Debt: The Emergent Student Loan Crisis from the think-tank Education Sector, found that in 2008, 92 percent of for-profit college students borrowed private loan programs compared with 53 percent of for-profit college
students using the same kind of high-interest loans in 1993. By
2008, the average debt for these students was $9,600 a year – just
slightly less than students obtaining the loans to attend private
four-year colleges – up 57 percent over the 15-year period.

"If this continues," authors Kevin Carey and Erin Dillon said in the report, "the
consequences will be severe: reduced access to higher education,
diminished life choices, and increasing rates of catastrophic loan

The growing college access movement, particularly the Obama Administration’s push to make the United States the world leader in holders of college degrees, gives special relevance to the report, just as Congress considers legislation to make college more affordable.

College access specialists say the report shows how important
it is for youths to get advice on how to choose a college, select a
career path and the options and pitfalls of college debt. They say the high default rates at for-profit colleges raise questions about the effectiveness of their programs.

"It could be that their degree didn’t prepare them for the job
market or prepare them to get a job," says Edie Irons, spokeswoman at
the Berkeley, Calif.-based Institute for College Access and Success.

Harris Miller, president of the Washington, D.C.-based Career
College Association, which represents the nation’s for profit college
disagrees. "We totally reject the argument that the default rate is
because it’s not a quality education," Miller said.

He noted that career (for profit) colleges must prove that
they are placing 65 percent to 70 percent of their students in jobs
related to their field of study in order to get accreditation – which
was confirmed by the two largest accrediting agencies of for-profit
colleges, the Accrediting Council for Independent Colleges and Schools
and the Accrediting Commission of Career Schools and Colleges of

Poor Students, More Defaults

Miller said for-profit college students default on their loans
more because they tend to be poorer. He disputes the report’s
prediction that more students at for-profit will default on private
student loans in the future because private lending is already limited
and becoming more so.

"They did their report at a time when private lending was at
its peak," Miller says. "My point is that the report is looking in the
rear-view mirror. They are assuming that private lending is going to
happen in the future and it’s not" because the credit market has

The report’s findings are generating discussions about whether
students should take the risk of borrowing or whether policy needs to
be changed to make borrowing unnecessary.

Quentin Wilson, President & CEO of Los Angeles-based All
Student Loan, says the $20,000 that students typically borrow for
college is about the same price as a new car, so youths should be
willing to borrow and invest the same amount on an education that will
lead to a lifetime of greater annual earnings.

"If it’s helping you finish a degree and you’re going to make
more money than if you don’t, it’s a good cost-benefit," Wilson says.

But not everyone agrees.

"Do we really want young people to mortgage their future in
order to have one?" asks Scott Gillie, CEO of Encouragement Services
Inc., which oversees Indiana Pathways to College, a professional development and resource provider for college access professionals.

"I would say that it’s horrible social policy to start people
off in life with $20,000, $30,000, $40,000, $50,000 of indebtedness or
more. And that’s independent of whether they are successful in
post-secondary education."

Gillie says in light of the growing amount of research that
shows the importance of a college education in today’s economy, the
United States needs to make college universally accessible like it made
high school during the first half of the 20th century.

But free college is not on the horizon.

Unmet Needs Dwarf Financial Aid

The Education Sector report found for-profit college students aren’t the only ones turning to unregulated private loans; overall 5 percent of college undergraduates had such loans in 2005, but 2008 it was 14 percent.

The students are stuck in a gap between the maximum amount of
money they can borrow through federal loans and their unmet financial
need – a gap that has only grown over the past 15 years.

The interest rates on the private loans can be as high as 19
percent, compared with 5 percent to 6.8 percent for most federal
student loans, according to Irons of the Institute for College Access
and Success.

"And unlike federal loans, it is much harder for students to
delay payment on private loans if (students) go on to graduate school
or become unemployed," the Education Sector analysis says.

The biggest increase in private loans took place among
students going to private for-profit colleges, which have also shown
the biggest increase in the percentage of students borrowing.

In 2004, the analysis shows, 16 percent of full-time students
at for-profit institutions took out private loans. By 2008, the number
had nearly tripled, the analysis says, to 42 percent.

Similarly, more black students are taking out private loans.
In 2004, black students accounted for the smallest percentage of
students taking out private loans; in 2008, black students represented
the highest percentage.

"This growth in private borrowing exposes more students to
financial risk" the analysis states. "Low-income students are less
likely to have a financial safety net from parents if they have trouble
repaying loans," the analysis says.

Gillie, of the Indiana Pathways for College Network, says one way to reduce student defaults is to intervene earlier in their academic careers to help them develop college and career aspirations.

"We’ve got to engage young people very early in the college planning process so they can … improve
their preparation for college," Gillie said. He said students often
default on loans because they drop out of college because of poor

"We think some of that can be attenuated through more
involvement of the student in a very conscientious planning process,"
Gillie said.

Lower Tuition?

But the Education Sector analysis suggests that low-income
students must turn more often to the higher-interest loans because more
student aid is going to less needy students.

"This is partly a function of simple bottom-line concerns,"
the analysis states. "A few thousand dollars spent to induce the child
of wealthy parents to enroll can be money well spent if his or her
parents write a check for the remainder and make a donation to the
alumni fund in the bargain."

The analysis recommends doing more to curb tuition – a move
that college and university leaders say is increasingly difficult as
states cut back on funding for higher education.

Increasing Pell grants, as the Obama Administration has begun
to do, will only go so far, the analysis states, but won’t deal with
the biggest factor in college costs: tuition.

"Until federal and state governments work with institutions to
restrain prices while simultaneously re-focusing financial aid on needy
students," the analysis states, "the tide of college debt will continue
to rise." (Education Sector)

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