*As Prepared for Delivery*
“Four years ago, America was caught off guard by the sub-prime mortgage crisis. Fast talking sales people deceived consumers into taking out loans that they knew would never be paid back, and financial speculators hid the risk and passed the debt off to investors. What has become clear over the past year, through this Committee’s investigation, is that there is a class of subprime colleges within the for-profit sector that are doing the exact same thing. Instead of packaging these loans into securities and selling them to investors, this time they’re passing the debt off to American taxpayers in the form of federally guaranteed student loans.
“Both student debt and for-profit colleges have a place in American higher education. I myself used a student loan to get through school. Some for-profit colleges offer important flexibility and an educational model that can work for students who are seeking educational advancement while also balancing jobs and family commitments. But there reaches a point where the education provided does not match the cost of the debt.
“Let me be clear, rising student loan debt is a problem for students throughout higher education. This is an issue that has received serious attention from the Committee in recent years and will continue to going forward. Why then is this hearing focused on for-profit colleges and their loan debt?
“The answer is that for-profit colleges have distinguished themselves by asking a higher percentage of their students to borrow, more than any other sector of higher education. 96 percent of students at for-profit degree granting colleges borrow to pay for college, compared to 13 percent at community colleges, 48 percent at four-year public, and 57 percent at four-year private colleges.
“How do so many students at for-profit colleges wind up with debts they cannot repay? It starts with high tuition. For a two year Associate Degree with an estimated annual earning power of around $40,000 a year, Corinthian’s Everest charges over $46,000, ITT charges over $44,000 and Westwood College charges over $35,000. In each case, a community college offering a comparable programs costs between $6,000 and $9,000. Similarly high tuition is found in bachelor degree programs. At ITT, almost $89,000 -- at Corinthian, over $81,000 -- and at Westwood, over $70,000. Meanwhile a flagship public school offers the same programs for $25,000 to $40,000.
“In order to afford this high tuition, schools point students towards federal loans. But many of these students are having serious trouble repaying these loans. Close to 1 in 4 students at a for-profit school is defaulting within 3 years, and defaults by students at for-profit schools account for 47% of all student loan defaults. High borrowing rates combined with high default rates have resulted in for-profit schools that enroll approximately 10 percent of American students but account for nearly 50 percent of all student loan defaults.
“You may ask how default rates could be this high. After all, there is a law in place intended to penalize institutions whose students default in the two years after leaving school at rates that consistently exceed 25 percent. The answer is that some for-profit schools have become skilled at manipulating their default statistics. They have either hired outside specialists or created their own units of “default management” staff who are paid to counsel students into repayment options that ensure that students do not default within the two (soon to be three) year window when the government is watching. This way schools are able to keep their default rates low enough to avoid Department of Education sanctions that would limit their access to federal financial aid. However, managing cohort default rates merely delays default for some students and can result in a higher debt when that default occurs.
“If the cost of tuition is so high that it exceeds what a student can borrow through the federal government, some schools are quick to offer their own loans. These are essentially subprime loans carrying high interest rates and even higher estimated levels of default.
“For example, in 2009 and 2010 Corinthian Colleges lent $240 million to its students at an average interest rate of 13 to 15 percent, with some students paying as much as 18 percent. For comparison, the Federal Reserve calculated the average interest rate on a credit card in 2009 as 13.4%. With their 18% interest rate Corinthian sends a pretty clear signal about where their priorities are when it comes to shareholders versus students. I suspect that’s why in late 2010, as more attention focused on the school’s business practices, the company lowered their average rate to 6.8%.
“But high interest rates only tell part of the story. In their internal accounting, companies estimate the percentage of students who will default and, in some cases, how much they expect to lose through these lending programs. According to their internal analysis, Corinthian estimates that 55 percent of its students will default on their institutional loans. It is seriously troubling that companies would find it acceptable to make these loans with the knowledge that such high percentages of students will be unable to repay them. While the school knows these loans are a terrible investment, the student has no idea that they are more likely to wind up with ruined credit than a college degree and a good job.
“Behind each student loan default is a person who has an unpayable debt hanging around his or her neck, too often with no degree to show for it. Someone who may have to put off – or cancel – plans to continue their education, buy a home or start a family. And while the federal government provides several flexible repayment options, there is no way to walk away from your student loan like you can a mortgage. You cannot discharge student loans in bankruptcy. It is a debt that follows students for the rest of their lives.
“Nor is it acceptable to simply blame these default rates on students. When a school enrolls a student, sets their tuition and recommends that the student take out a loan, the school is making a de facto investment recommendation. Because schools are so focused on their default rates, they are in the best position to know whether this student is likely to succeed academically, earn a degree that will actually help them secure a good job and be able to repay their loans.
“For those who would say that holding schools accountable for whether their students repay their loans will discourage them from enrolling low-income and minority students, I have this to say: access to debt is not the same thing as access to the opportunity offered by a good education. States have designed a national network of low cost, open access community colleges to make sure that students who have a low probability of graduating are able to try out higher education with very little financial risk. I, for one, welcome for-profit colleges into the open access space, but not if it comes at the cost of universal borrowing and 50 percent default rates. That is not access. That is the second coming of the subprime crisis.
“At a time when Congress is single-mindedly focused on our federal debt, how can we blindly maintain policies that foot the bill for students to attend schools that have proven to be such a bad investment? In 2009 for-profit colleges received $18 billion in guaranteed student loans. If trends continue we can expect nearly half of those loans to default. This should not be acceptable to those of us who are stewards of taxpayer dollars. High default rates mean ruined credit and garnished wages for students and more spending for taxpayers.
“The Department of Education has taken an important but modest first step towards addressing this problem with the newly final Gainful Employment Rule, I know all of us on the Committee had been looking forward to hearing from Secretary Duncan on that subject but unfortunately illness will keep him from joining us. I hope that he recovers soon. We are pleased to have the Under Secretary for Education Martha Kanter with us on very short notice and appreciate her deep expertise on higher education and access for low-income and minority students. This rule is modest a first step that will address some of the issues surrounding student debt and default that we are exploring today.
“This is the Committee’s fifth hearing on for-profit education companies. The hearings have each helped to give a much more clear picture of how this industry operates and how it serves students and taxpayers. I look forward to engaging with parties on all sides of this issue as we move towards using the information gathered to date into new legislative protections for students and taxpayers.
“I believe it is clear that more needs to be done to ensure that taxpayer dollars are being used wisely, and to ensure that for-profit colleges are actually fulfilling their commitment to provide a quality education that leads to better jobs and economic advancement.”