mead cohen berger shevtsova garfinkle michta grygiel blankenhorn
Winter for Higher-Ed
For-Profit Ed Falls on Hard Times

ITT Educational Services, one of the largest for-profit schools in the country, has gotten itself into hot water with the SEC and CPFB for its student lending practices. The investigation could be a sign of big trouble ahead for the for-profit market.

NYT profile breaks down the investigation. Like all for-profit higher-ed companies, ITT needs to make sure that no more than 90 percent of its income comes from federal loans in order to remain eligible for those loans. Unfortunately, the increasing student debt burden and declining wages have pushed up defaults, scaring off private lenders and making it more difficult for the school to meet this 90 percent threshold , particularly given that it caters to lower-income students who are less likely to pay out of pocket.

To solve this problem, the school found an ingenious workaround known as the Peaks Private Student Loan Program, as explained by the NYT:

The program was financed by an off-balance-sheet trust that raised over $300 million from investors, to whom it issued debt. This debt was guaranteed by ITT, but an unaffiliated lender used the cash to make loans to ITT students. Those loans were then put into the trust.

Because the lender was unaffiliated with ITT, the loans qualified as private money under the 90-10 rule. The company, therefore, ensured that its students could keep tapping into federal grants for the other 90 percent of their education costs.

This program was successful for a time, but it has one big problem: students have been defaulting. A lot. ITT expects the default rate to be nearly 60 percent, compared to just under 15 percent for federal loans. ITT is now kicking its own money in to the fund to keep it solvent, with a tab that could go as high as $100 million. The school can probably afford this, but paying so much into the fund could put the school over the 90 percent threshold for federal aid, making it ineligible to enroll students with federal loans. Given that federal aid programs account for 80 percent of its revenue, this is a serious problem that could threaten the entire business model for the school.

Thus far, most of the conversation of the student loan crisis and declining student enrollment has fixated on nonprofit schools in the public and private sector. But while many of these schools are struggling, some massive, for-profit schools may be in even bigger trouble, especially if federal student aid is cut back in any way. This may be a good thing for students. While we believe that for profit-education can be a good thing—for-profit institutions may play an important role in the development of MOOCs, for example—diploma mills that have been set up specifically to take advantage of federal student aid and leave their students deep in debt strike us as a pernicious development that we could do without. The fact that federal aid programs have been propping these institutions up for so long is yet another reason that the system could use a serious rethink.

Features Icon
show comments
  • Jim__L

    This is really too bad, since the skills taught in a number of ITT classes are more salable than those taught in most Humanities programs.

    Something that a number of companies do these days is to make reimbursements contingent on successful completion of classes. It would probably motivate people to do well in classes if the loans got called in if they didn’t pass the courses.

  • Kavanna

    And what of Harvard et al., the so-called “non-profit” sector? Student loans are just the thing to drive up tuition everywhere. Somehow, these schools will never be examined for this, just as subprime lending was never brought front and center as the heart of the mortgage crisis. Instead … cue … “progressive” politicians will lash out against “greed.”

© The American Interest LLC 2005-2016 About Us Masthead Submissions Advertise Customer Service