Subprime, Student Edition - and what happens when the system crashes? | Hacker News Reader

Subprime, Student Edition - and what happens when the system crashes?

thebigmoney.com

24 pointscwan17 comments

Making providers pay back part of the tuition if graduates default on their loans would at least make them market useless courses solely to people who can afford them, so I suppose that's a positive.

I can think of two other things we could do to fix the problems with tertiary education:

1) Force providers to publish detailed statistics stating the average salaries before and after tuition and the employment prospects of graduates afterward. This would (hopefully) keep people from choosing to undertake useless courses even if they can afford them.

2) Remove the federal backing and bankruptcy protection attached to educational loans. If students aren't likely to be employable after going to one of these for-profit courses then no one would be willing to lend them the money.

These would also serve to curtail non-profit universities that have been foisting overpriced and worthless degrees on students.

philk -- I love your idea about forcing colleges to provide stats on how many graduates have jobs and how much they earn say 1,2,5,10,15,20, and 25 years out, but I think in practice it's pretty tricky to do -- how do you classify eg someone who got a philosophy degree and makes a living as a software developer? Don't get me wrong, I agree 100%, if for no other reason than students and the state should be able to see what we're buying for our money, but there are some hard details to work out.

But in general, I can't agree more. There's no reason for the thieves running banks to have bribed their way into risk free loans to students. Especially since we didn't have an epidemic of problems before 1998. Let's let them live by their market discipline credo.

And plus I know I would not be willing to give my University the details of my salary, unless they retrieve them from a salary survey company.

This is just FUD directed at competition to the entrenched players in the college industry.

OMFG, Ashford got 85% of their money from the government? Rutgers got about 70% of their money from the government (state and federal) [1]. CUNY gets at least 65% of their money from the government, probably considerably more if any of their students get financial aid [2]. Unlike Rutgers or CUNY, Ashford is 100% dedicated to education (rather than partially education, partially research).

While I'm all in favor of reigning in spending on education, for-profit colleges are not the only problem here. Non-profits are just as bad, the only real difference is that profits are given to overpaid and underworked employees instead of shareholders.

[1] For the general budget: http://budgetfacts.rutgers.edu/pdf/revenue_sources_pie.pdf Some of the "tuition" money also comes from the govt, see the tuition page which gives the average financial aid package: http://admission.rutgers.edu/costs/TuitionAndFees.aspx

[2] http://www.cuny.edu/about/administration/offices/bf/2010-201... . I can't find numbers on the average amount of student aid at CUNY.

From the article:

For-profit schools now enroll 8 percent of students—but as Eisman’s report shows, they take in a full 24 percent of federal student aid.

This suggests that they are exploiting the system more than the non-profit colleges[1].

Also from the article:

Last year, BPE’s two schools took in $454 million in tuition and fees from their students. If Ashford’s academic reputation has not grown as fast as its enrollment, it is no surprise, considering where all that money went: $145 million was spent on marketing and recruitment, which is $25 million more than the colleges spent on instruction.

Hence they've only been spending ($145m - $20m)/$454m = 27% [2] of their fees on education.

[1] Not that they're blameless either. I'm just saying they're less bad on this particular axis.

[2] Or 32% of the federal aid money they receive.

No, it suggests they are exploiting the federal student aid system more than non-profit colleges.

And even so, all it does is suggest that. It may also just suggest that non-profits have more lower income students than for-profits (what middle class child goes to DeVry?). Note that federal student aid is means tested by income of the student's family, as opposed to things like state aid which go directly to the school.

Uh yes, it's possible that for profits are providing better services at a lower cost and this justifies them tempting more customers to take out large loans to pay for their services.

It's possible but I'd rule it highly unlikely given the motives of the schools, the dynamics of the markets and recent history.

From TFA: "For-profit schools now enroll 8 percent of students—but as Eisman’s report shows, they take in a full 24 percent of federal student aid. [...] Right now, colleges bear none of the risk of defaulted loans. It’s the same separation of risk and reward that Eisman saw in the subprime industry. The solution he’d advocate is simply making the colleges pay back the government a share—as much as 50 percent—of the loans that go back."

I would note that graduates of for-profit institutions have default rates significantly higher than those public and non-profit institutions [1], even when comparing for-profit institutions to community colleges. For-profit colleges have every incentive to maximize enrollment and encourage students to max out their loans while spending as little as possible on instruction. We agree that reigning in education spending is important, but the for-profit system, as currently incentivized, will keep costs to the public and the students the same as it ever was while redirecting money from teaching to shareholders.

> Unlike Rutgers or CUNY, Ashford is 100% dedicated to education (rather than partially education, partially research).

Research is an important part of education (perhaps not vocational education). Ashford is 100% dedicated to maximizing returns to shareholders; education is necessarily secondary. This is demonstrated by the fact they spend more on marketing than instruction. I'm not saying it's wrong for them to do this, but as a for-profit entity they have no incentive to behave otherwise.

[1] http://online.wsj.com/article/SB126075983194590097.html

Non-profit colleges have the same incentives. The main difference is that instead of rewarding shareholders, they reward administrators and some faculty.

Also, the WSJ article you cite shows that for-profit colleges have only marginally higher default rates than community colleges. It makes no effort to control for the quality of student, which could easily be the cause of the small gap.

Research is an important part of education (perhaps not vocational education).

The point is that unlike Ashford, Rutgers also gets research money from Big Pharma, etc. This lowers the proportion of money Rutgers gets from the government.

Regarding research, while it's important for a small minority of students at top schools, it's irrelevant to the sort of students who would enroll at ITT Tech or Ashford.

No, nonprofit colleges have nothing like the same incentives as for profits. For starters, eg community colleges often, by design, lose money on each student they educate. They also, as demonstrated by points upthread, do a better job of education when education is graded as investing in successful student education.

What does "lose money" mean? Does that mean tuition < cost per student, or that tuition + govt funding per student < cost per student? You might be correct if government funding for community colleges is given in a lump sum rather than on a per-student basis. But even then, you are only correct for students above N=(lump sum)/(cost per student), which is true even for for-profits (where N=max occupancy of their classrooms).

The fact is, plenty of non-profits try to increase enrollment to whatever level they can reasonably support. The non-profit I attended as an undergrad advertised widely (and fraudulently), and even tried to make early/on time graduation as difficult as possible (just another way to increase enrollment).

> Non-profits are just as bad, the only real difference is that profits are given to overpaid and underworked employees instead of shareholders.

I truly hope you aren't talking about professors here... they're in quite the opposite position. I think it's a damned shame how little professors make, unless they're at an absolutely top-notch university.

I am mostly talking about administrators, but some professors are included. A non-trivial number of professors (10-75%, depending on school) are deadwood (i.e. people with tenure who gave up on work).

An elephant in the room regarding student-aid originations: for-profit schools have disproportionate success marketing tertiary education to non-traditional older, working class, black/Hispanic students, in much the same way that subprime mortgages successfully got those same folks home ownership. They tend to require more student aid than traditional (white, middle class, 20-something) students because they lack familial resources to write a five figure check.

For better or worse, it is the (enormously popular, bipartisan) public policy of the United States that increasing access to education and home ownership is valuable in and of itself. It is not possible to achieve that public policy and have all students have default rates comparable to those of Andover graduates.

Frontline did a great piece on this called College, Inc.

>"Both the subprime-mortgage business and for-profit colleges are built on giving loans to people who can’t pay them back."

I think they're missing the slight point that a college graduate will hopefully turn into a person who has a constant and decent inflow of income.

No, they simply aren't missing that point.

Yes, a college graduate is likely to have a higher income. That doesn't mean they can't barrow more than they are able to pay back. In the subprime days, the line was "a house has intrinsic value". Yes, it has intrinsic value but not unlimited value - especially when the market starts to experience a glut.

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