Life After Debt?

Print More

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 from 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 default."

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 Technology.

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 crashed.

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 performance.

"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."

Jamaal Abdul-Alim covers College & Careers under a grant from the Bill & Melinda Gates Foundation. He can be reached at


  • Paula McKibbin, Esq.

    Get this bill that you can forward to everyone who might be interested. We are creating a website, and it will be ready soon. Anyone can get a copy of this bill by e-mailing Peter O’Lalor and I wrote this bill together.

    This bill is very comprehensive and unlike any other pending legislation. We are asking for a return of bankruptcy rights and protections that were taken away from us by ex-President Bush, consumer protection rights (right to notice and hearing), a flat 2% interest on student loans, and an expansion of student loan forgiveness programs (both public and private with tax incentives to those who participate), etc.

    We ask that everyone read the bill, share it with as many people as possible, send it to media people and legislators, as well as organizations that might support it, and ask all of them to sponsor the bill or help bring it to the attention of others.

    The area of student loan debt is a huge problem in this country and is not being addressed by those who were voted into office to help their constituents. Sad to say, but the student loan creditors have “bought” many legislators and schools by paying them off – either in kickbacks or campaign donations. The student loan credit industry is a multi-million-dollar profitmaking business every year.

    What will the student loan creditors do for debtors? Nothing. The student loans are not dischargeable in bankruptcy, just as the IRS and child support payments are not. But even the IRS and child support people work with debtors and will reduce balances and payments. The student loan creditors will work with nobody. They will not lower payments or take off any interest. In fact, even when they grant forebearances, the interest on student loans accumulates at a daily cumulative interest rate. There are only two reasons when a student debt will be discharged – if the person dies or becomes so severely disabled that there is no possibility of ever working again. If parents co-sign on student loans, the student loan creditors go after them. Most of what people owe them is interest upon the interest.

    I didn’t realize what was going on with my student loan debt until two years ago. They claimed that I owed $100,000 on student loans. They refused to give me paperwork or anything to show what I’d paid off and how they had calculated the balance. I had to pay $686/month. At the end of that year, even after making these high monthly payments, my balance went up to $112,000. I stopped paying and demanded an explanation. They turned around and added more interest. Then they garnished my wages without any notice to me or the right to a hearing. In two years, my loan went up to $160,000+, according to the notice they sent to my employer. This is a loan that is 18 years old. The interest accumulates faster than one can pay it off. It anyone gets sick, laid off, goes to jail, becomes unemployed, etc., the interest never stops on the debt. No wonder the student loan creditors are making a fortune.

    I had hoped for years that the equity in my home would pay off a chunk of this nightmare loan, but because of the economic downturn, my home had negative equity. My job as a public defender was supposed to get a loan forgiveness program that would have wiped out $10,000 off my loan for ever year I worked. The bill passed both houses, but it died in the appropriations (funding) committee. So I, like many of my colleagues, are enslaved for the rest of our lives to the student loan creditors unless we can somehow get relief. This would only be at the grassroots level with substantial efforts by many. There are hundreds of millions of us in the U.S. in this present predicament. Most are too ashamed or overwhelmed to know what to do.

    I took furlough time from my low-paying job to write this bill with another person who is disabled and suffering from the same student loan debt problems. He is very intelligent and has his own story about what the student loan creditors did to him. We hope that everyone will share the bill and get it in the public eye. If a legislator rewrites it but keeps the essence of the bill, that would be super. We just need legislation to help everyone in this predicament. Nobody else in society is treated this way. Even if someone has a failed business or too much credit card debt, he can file bankruptcy and get this behind him – start over. We will die and still have a balance on our student loan debts. We cannot put away money for retirement, help our children with college, or just pay the bills and enjoy something in life. There is nothing that we can do to get relief unless we were to win the lottery!

    Thank you very much for helping us with this effort. You can share the bill and this e-mail message with whomever you like.