The US education department has created an enforcement unit to target institutions that lure students in with deceptive marketing, sign them up for courses for which they lack the skills, or request federal financial aid for them dishonestly. Ted Mitchell, undersecretary at the education department, says the number of vulnerable borrowers has risen partly because colleges are admitting more adult students, including single mothers and military veterans in their twenties and thirties.
This tier of people tends to be lower income than the traditional middle-class student, whose parents drop them off in the family minivan at a two or four-year institution, Mr Mitchell says. So not only is more of the weight falling on students and families, but it’s falling on an increasingly less well-off population . . . and they don’t have the wealth buffer to fall back on.
America’s student debt woes have their roots in the recession, which delivered a triple blow by forcing students to take on more borrowing, even as struggling states cut support for tuition and job opportunities diminished for graduates.
Under the US system, the payday loans with prepaid card federal government and states provide grants and loans to students, but state governments have cut funding in recent years.
The federal government’s loans, which have low interest rates and do not require credit checks, go direct to students and are administered by the education department and funded by the Treasury
For-profit colleges have flourished since the start of the 2000s by meeting demand for higher education that existing public and non-profit institutions could not satisfy. They offer convenience and flexibility for growing ranks of non-traditional students who do not have the grades for a four-year university course and may want to attend part-time while working.
Many of the colleges have come under mounting regulatory scrutiny and earnings pressure amid high student default rates and investigations into claims of aggressive marketing. Corinthian Colleges, one of the largest for-profit chains in the country with 16,000 students, last year filed for bankruptcy protection amid government allegations it misled students about their chances of getting a job. Corinthian did not admit any wrongdoing when the allegations were first aired and said it did not deserve to be forced to shut down when it announced its closure last April.
The education department has received almost 10,000 applications from students seeking to have their debt expunged under a federal law that forgives debt for borrowers who prove their schools used illegal methods to enlist them.
At Westwood, the remaining students will transfer to other institutions after its closure, scheduled for Friday. The chain, owned by a private education company called Alta Colleges, which is majority owned by private equity firm Housatonic Partners, has previously been accused of using misleading tactics to recruit students. In 2012 the Colorado attorney-general reached a $4.5m settlement following allegations that the institution inflated job placement rates. Westwood made no admission of liability as part of that settlement.
In a statement announcing its closure, Westwood blamed declining enrolments on market shifts and changes in the regulatory environment and said it was proud of its achievements.
Luke Herrine, from the activist group The Debt Collective, is pushing for debt forgiveness by the education department. Defaults are outrageously high among poorer Americans, he says. He argues the rise of for-profit institutions has created a problematic dynamic among people of modest means and believe college will enhance their ability to move up the income ladder, yet leave their courses financially vulnerable.
Research by Adam Looney of the US Treasury and Stanford’s Constantine Yannelis bears out that concern. The report found that students who had exited a for-profit college or two-year college course in 2011 represented 70 per cent of defaults by 2013, and that they were more likely to be unemployed than those who left traditional universities. The borrowers with the biggest debts tend to have attended graduate schools or big-name universities, yet they are not the ones most likely to struggle to pay the debts off afterwards.