National Consumer Law Center
Students planning to attend for-profit colleges are finding it easier to borrow money from the institution itself to bridge gaps between the total cost and what they can get in grants and federal loans. The institutions are stepping in after third-party, private lenders stepped out of the market as the economy became dismal in 2007 and 2008.
But a new report by the National Consumer Law Center entitled, Piling It On: The Growth of Proprietary School Loans and the Consequences for Students, calls for regulation of these institutional loans – which can carry interest rates of 25 percent or more – and often function simply as an end-around to meet the government’s rule that 10 percent of a school’s income must come from other than Department of Education financial aid.
The report, by NCLC staff attorney Deanne Loomin, states that many of the colleges include expected default rates of 50 percent of more into their budget and simply write off the bad loans by deducting them from their revenue, as though the money never existed.
For-profit colleges are advocating loosening of the 90/10 rules, arguing that otherwise they will have to raise their tuitions, which already are often far higher that public and nonprofit institutions.
“These are astronomical write-off rates,” Loomin writes. “… The schools seem to view these loans as ‘loss leaders’ to keep the federal money flowing. However, the view from the student perspective is much different. Students do not care how the high default rates help the companies maintain high tuitions and present a more attractive front to investors. Each charge-off represents an individual who cannot repay a debt and who may be facing aggressive collection tactics.”
The student in default – which sometimes comes after just one missed payment – often cannot get transcripts or may be terminated by the school mid-term.
The report recommends that institutional loans should not be allowed to count as private funds and therefore be included in the 10 percent category, as they are under current law. It also pushes for all federal aid, not just Department of Education loans, to be counted in the 90 percent. Currently school grants for veterans do not count against the 90 percent category, but as classified in the 10 percent private money category.
More important, the report argues that the loans should be regulated under by the Truth in Lending Act, if not by the Federal Trade Commission. It notes that the establishment of the Consumer Financial Protection Bureau, which will debut in July, should bring more regulation to the loans.
