Our Magnanimous Government Will Use Your Money to Waive Student Debt

It begins. The student loan crisis that has been just over the horizon.

The federal government has announced that it will forgive loans to students lured to colleges by fraudulent marketing promises. The policy stems from
the bankruptcy of Corinthian Colleges, which had been preceded by student protests and their refusal to pay for worthless educations. But Education Secretary Arne Duncan says that the waiver policy will apply to money owed by students defrauded by any college, public or private.

The cost for Corinthian alone, should all its 350,000 students of the last five years apply to have their debts wiped clean, would come to an estimated $3.5 billion, said the Department of Education.

Our article, "The Intractable Student Loan Mess", previously dealt with the mounting threat to taxpayers, who will be on the hook ultimately to pay for students who default on their loan repayments. And that article cited several ways that the government will forgive loan balances after good faith payment records, with the waived cost passed on to the public. But we need now add to that the new category of wholesale waivers that absolve students of their entire debt in the wake of college bankruptcies. "There will be more", says Duncan.

The government student loan program was designed for disaster. The policy of issuing loans to virtually any youth to go to any school led large corporations, private equity firms and even hedge funds to chase after the huge pool of government money. At peak they had created some 2,000 for-profit colleges, some no more than storefronts. Little emphasis was paid to academics. The marketing departments, whose job it was to talk prospective students into taking out government loans to pay to their colleges, often outstripped the size of the faculty. None of them could have continued without the loose accreditation policies of the Education Department that made the colleges eligible to be paid by government-issued student loans, because they subsisted almost entirely on that source of revenue.

The outcome has been that, while the for-profits account for only 12% of students, they account for nearly half of all loan defaults. Only 32% of students stay to graduate from the four-year programs, earning degrees viewed as inferior by employers. The other two-thirds drop out with nothing to show for their mistake but debt. Of 21 institutions that last fall were running default rates so high that they could lose the right to accept federally issued students loans, 20 of them were from the private, for-profit ranks.

Worse, federal data analyzed by the Institute for College Access and Success shows that graduates of for-profit schools are more likely to have debt of $40,000 or more, given that those marketing departments prey heavily on low income youths persuading them to take their over-priced calorie-free courses.

The experience with Corinthian will no doubt be repeated. The Department of Education (DoE) has generally had difficulty getting the performance statistics from Corinthian that are required for accreditation. Without that validation the government won't issue loans to students who want to attend a school. Early last year the DoE gave Corinthian a deadline to produce data and when the college said it could not, the government put a 21-day hold on turning over any further money from loans until Corinthian came up with the data.

This caused a cash crisis. So completely dependent on government-issued student loan money is Corinthian — that's why these colleges exists, after all — that 90% of their revenue vanished. The government gave the school tide over money but told it to sell assets and liquidate.

The Wall Street Journal wrote a string of outraged editorials decrying (in this example) the government's "regulatory ambush" that "began to drive Corinthian out of business by choking off" student aid for "supposedly stonewalling exhaustive document requests" and had forced the company "at gunpoint" a year ago to sell 85 campuses and close a dozen others. Government forcing closure of a business was the offense, not the swindle. The paper's own news columns acknowledged that a number of state attorneys general had filed "scores of lawsuits" alleging fraud in recruiting students. It had falsified grades, attendance, and job-placement statistics. At least one of its schools had paid temp agencies to hire graduates for a couple of days so they could be counted as employed. A 2014 Consumer Finance Protection Bureau lawsuit claimed that Corinthian had “lured tens of thousands of students to take out private loans to cover expensive tuition costs by advertising bogus job prospects and career services”. The DoE had fined the college $30 million for 947 instances at just one campus of phony post-graduate employment data. These were "paperwork errors", said a Journal editorial. Add to it all that other colleges do not honor Corinthian course completion credits.

It is the Department of Education itself that issues loans to students and decides which colleges qualify to receive payment from those loans. The Department itself then collects from students. The DoE has been slow to see the problems coming and slower still to act. This page first reported in "The Next Financial Crisis: Student Loans" almost three years ago — and since.

Now, as the DoE discovers it has been less than rigorous in accrediting colleges before handing them billions in loans, Secretary Duncan belatedly declares himself shocked to find that for-profit schools have brought “the ethics of payday lending into higher education”. The DoE will increasingly face having to bring about their collapse by shutting off their eligibility for payment by student loans. That in turn leads to cancellation of the students' debt, aggravating the cost to the public that the reckless largess of the department for approving loans to those Potemkin colleges to begin with.

Congress has always been complicit in the student loan program. More than one of the 2,000 colleges are bound to be in everyone's home district, so Congress members champion the for-profits for the money they bring. More than that, Congress views students as a profit center, as reported here two years ago when there was a fight to keep the interest rate on loans at a reprehensible 6.8%, callously indifferent that these are students who will be entering entry-level jobs, if fortunate enough to find a job, and at a time when banks were borrowing — as they still can — from the government at virtually 0%. So avaricious was Congress to make money off students and burden them through their lives that it passed a law stating that even if you declare personal bankruptcy, you cannot discharge a college loan debt owed to the government.

Now that the predicted problems are breaking out, Congress wants us to think its hands are clean. Lamar Alexander, Republican senator from Tennessee and chairman of an education committee, thinks the cost shouldn't be the problem of the government even though its accreditation helped dupe the students into trusting the schools and it was the government that handed them the loans to pay to those schools. Yet Lamar says, “If your car is a lemon you don’t sue the bank that made the auto loan; you sue the car company”. How would that work out, each student independently suing a bankrupt school, while the government says, "None of our doing"?

There is already a decades-old law that grants debt relief to students at colleges that close their doors, but by expanding that to fraud, seemingly whether a college has closed or not, . Duncan is being magnanimous with other people's money — ours. He said in a conference call with reporters that the administration is “determined to crack down on colleges that leave students with huge debt, worthless degrees and few job prospects”. But as it chokes off giving loans to students to attend schools that graduate too few, or that show dismal post-graduate employment rates, or are found to falsify such data, it will be the government itself — shutting the schools its indiscriminate lending allowed to exist — that will cause the mushrooming loan cancellation costs, sticking taxpayers with the tab.