Get Ready For The Edu-Debt Crisis

Jeff Bryant

This week the US House of Representatives, with bipartisan support, passed a bill, H.R. 2117, with the misleading title of The Protecting Academic Freedom in Higher Education Act.

The title is misleading because the bill has absolutely nothing to do with “protecting academic freedom” and everything to do with making our country more vulnerable to a rapacious campaign to turn America’s entire system of education into an enterprise that can be exploited by corporate rentiers.

As noted by the ever astute Think Progress, the main thrust of the legislation is to “repeal the Department of Education’s new standardized definition of the term ‘credit hour’ and end federal efforts to ensure states get to regulate lower-quality educational institutions operating within their borders.”

The bill is being sold by Republicans — the sponsor is North Carolina’s tea party acolyte Virginia Foxx — as an antidote to “heavy handed regulation” that prevents higher education from being “more affordable.” But don’t be misled.

This bill isn’t about affordability as much as it is about opening the gates to more for-profit higher education providers to have easier entry into the market and more flexibility to offer low-quality degrees and certificates.

A Foxx in the Higher Education Henhouse

As the chair of the House Higher Education Subcommittee, Foxx is a staunch ally of for-profit higher education. The Chronicle of Higher Education has noted that Foxx received $3,000 in donations to her 2008 re-election campaign from the political-action committee of The Association of Private Sector Colleges and Universities, which represents for-profit colleges. And employees of Keiser University, a for-profit institution headquartered in Florida — far from Foxx’s district in North Carolina — gave $2,300 to her campaign. According to the article, “Harris N. Miller, the president of the private-sector association, welcomed Ms. Foxx’s appointment, saying she has ‘shown a lot of interest in our sector.’”

According to another report, this one at the online news site Color Lines, Foxx opposed the Obama administrations student loan reforms that “took away $60 billion in government-backed subsidies for student loan companies that provided federal student loans at zero cost to themselves but at a high price to students.”

As the Color Lines post goes on to explain, “SAFRA, as the student loan reform bill was called, also boosted Pell Grants, the federal grants for low-income students. All of this, Foxx is opposed to.”

So the author of this legislation is without a doubt pre-disposed to favor whatever serves the corporate agenda for handing over student loans to private interests.

This allegiance to for-profit higher education and animosity to government funding and regulation of college education lending looks even worse when you delve into the track record of these institutions.

The Woeful Track Record of For-Profit Higher Ed

First, for-profit colleges are way more reliant on federal aid than their not-for-profit counterparts are. So there is a legitimate reason for making them more accountable.

In 2010, the Senate Committee on Health, Education, Labor and Pensions conducted a study of for-profit higher education institutions that concluded that many of the students at these colleges leave without a diploma at an alarming rate with a significant amount of loan debt. “More than 95 percent of students at two-year for-profit schools and 93 percent at four-year for-profit schools took out student loans in 2007. Only 16.6 percent of students attending community colleges took out loans during the same time period. At four-year public schools the borrowing rate was 44.3 percent, still half the rate of four-year for-profit colleges.”

Despite these dismal student success rates, for-profit institutions are raking in record profits:
• For the 16 companies analyzed, profits in 2009 totaled $2.7 billion. Between FY2009 and 2010, one company more than doubled its profits from $119 million to $241 million, while a second went from $235 million to $411 million.

More recently, according to data unearthed by the education investment advisor group Education Sector, between 2001-2009, the percentage of students needing to borrow to attend higher education increased by 6 percent overall. But this percentage increased dramatically among those attending for-profit colleges — 11 percent for for-profit 4-year institutions, 24 percent for for-profit less-than-4-year institutions. Meanwhile, the drop out rates at these for-profit institutions rose sharply during this time — 20 percent for for-profit 4-year institutions, 9 percent for for-profit less-than-4-year institutions — compared to a 6 percent increase in the overall higher ed market.

Last year, when the Government Accounting Office conducted an investigative report on the quality of for-profit colleges, it found that these institutions often paid little to no attention to students who falsified their qualifications to attend, students who routinely skipped class and missed assignments, and students who turned in shoddy or plagiarized work. The report concluded that there was a “need for stronger oversight of the for-profit education industry in order to ensure that students and taxpayers are getting a good value for their investment in these schools.”

And yet another study, this year from the National Bureau of Economic Research, found that because “low-income students enroll in for-profits at four times the rate of other students,” and they are charged “nearly double” the tuition charged at other comparable non-profit institutions, “one in four for-profit students will default on their [student] loans within three years — as opposed to 8.7% of students at non-profit four-year institutions.”

Another recent study on for-profit colleges concluded that graduates from these programs “find it harder to get work and can expect lower pay when they do.”

Despite this woeful track record, the for-profit higher education business continued to boom – growing by 26.5 percent in terms of percentage of institutions — between 2005 to 2010 and now constitute nearly one out of every ten students enrolled in higher ed.

Yet unlike other businesses that have as a goal to produce a product or service of comparable or better quality at a better cost-efficiency and higher profit, the purpose of the for profit sector is driven by other interests.

Turning Students into SLABS

As this country recently witnessed with the run up in subprime mortgages fueling a speculative market in high-risk derivative securities, what we are seeing again is a market in subprime education lending being turned into “asset backed” securities for speculative investments.

These student loan asset based securities, or SLABS, have a performance history that has “been very good and investors rate of return has been excellent,” according to an article in Wikipedia.

Speculators on Wall Street clearly foresaw the increased demand in education that the crashing economy would produce. After all, education is often what people turn to when they’re thrown out of a job, are trying to increase their income, or are delaying entry into the work force.

Yet at the same time demand for education was increasing, state governments across the country were slashing education spending in order to balance budgets. These cuts, in turn, led to increased tuition rates.

As Alan Nasser and Kelly Norman explain in a post at Common Dreams, “as tuitions increase, loan amounts increase, as do private loan interest rates, which have reached highs of 20 percent. Add that to a deeply troubled economy and dismal job market, and we have the full trappings of a major bubble.”

And if you thought that qualifications for mortgage loans during the build up of the housing bubble were ludicrous, consider that when it comes to student loans, “a credit score is not required for federal loan eligibility. Neither is information regarding income, assets, or employment. Borrowing is still encouraged in the face of strong evidence that the likelihood of default is high,” Nasser and Norman explain.

Nevertheless, the interest in SLABS is likely to increase. Again, Nasser and Norman: “Ditching a student loan is virtually impossible, especially once a collection agency gets involved. Although lenders may trim payments, getting fees or principals waived seldom happens.”

A Huffington Post article by Chris Kirkham adds yet more rationale for the appeal of SLABS:

Unlike in the mortgage markets, where some unwise or unlucky investor got saddled with the bad loans after the festivities ended and home prices fell, this new market in higher education boasted seemingly unlimited growth potential at virtually zero risk. The burden of college loan repayment falls entirely on students’ backs, shielding corporations from the consequences of default. The colleges essentially receive all their revenues upfront, primarily through federal government loans and grants for tuition, regardless of whether students are able to gain employment and pay back their loans.

So what is building up in the higher education market is a massive amount of “edu-debt” that will saddle someone — namely, taxpayers — with a huge bailout fee and leave countless numbers of students and their families embroiled in financial hardship.

Public policy, like what is being proposed in The Protecting Academic Freedom in Higher Education Act, is apt to exacerbate this. And if it isn’t bad enough that these policies are becoming pervasive in higher education, they are also being rolled out in the much larger K-12 market.

Now the Edu-Debt Wave Hits K-12

For sure there is strong evidence of corporate interests in gaining short-term profits from the education market. The record of venture capital dollars flowing into the education market is at an all time high according to the trade weekly Education Week.

“Venture capital transaction values in the K-12 field, which include both public and private schools, increased from roughly $130 million in 2010 to $334 million last year,” the article notes. And the K-12 sector now outpaces higher education in the amount of money flowing into new ventures.

School reform enthusiasts, such as Whitney Tilson, who co-founded Democrats for Education Reform, have been quoted in the New York Times and elsewhere declaring that schools are great investment targets because “hedge funds are always looking for ways to turn a small amount of capital into a large amount of capital.” (hat tip Mike Klonsky )

And a newer venture, online “cyber charter schools,” offers yet another target for profit. In the state of Pennsylvania, according to a recent account from PBS, a Pennsylvania company, PA Cyber, profited by $20 million last year alone.

But venture capital profit is by no means the endgame here. Like the college market — which mimicked the housing market — the goal is to tie future profits to increased debt. As the economist Dean Baker has explained, this time quoted in an article by Paul Rosenberg at the website for Al Jazeera, a wave of venture capital into a market is often followed by a wave of private equity capital because private equity capital has less risk with greater long-term returns.

Plus, the same dynamics working the system of higher education student loans is working K-12. At a time of economic recession and rising demand for education, most states and municipalities are cutting back on funding. This puts school districts into financial difficulties that they are more apt to ameliorate by taking out loans.

Big investment firms such as Orrick, Herrington & Sutcliffe LLP (pdf) are touting the “interest free” prospects of investing in school district debt including TRANS financing instruments that can be used to finance “cash flow deficits” without voter approval, and at 12 percent interest rates.

Already school districts in Colorado, Pennsylvania, and California are being sucked into financing their ballooning debt levels with derivative-based loan deals with financial firms, including, often, the same ones that were involved in mortgage loan schemes that crashed the economy.

Time to Take a Stand

Now let’s circle back to the House bill titled The Protecting Academic Freedom in Higher Education Act that enables the pillaging of the public’s right to education.

It’s quite likely that the bill will fail in the Democratic controlled Senate. But let’s not be complacent here.

The corporate driven hunger for debt-related profit is insatiable and remorseless. It cares not one whit about the wake of destruction left behind. And the oncoming wave of edu-debt will be a catastrophe for the next generation and an undoing of many years or progress.

It’s not too late to change the trajectory of this. Progressives need to oppose these measures that are driving funding of education to corporate coffers. And we need a reawakening to the values of accessible education that made this country great.

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