Whose Fault Default?

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There’s an interesting piece over at Center for College Affordability and Productivity about for-profit colleges and the student loan default rate. As numerous people have written lately, students attending for-profit colleges have much higher student loan default rates than other students. As Daniel Bennett writes, however:

The most important cause of this [default rate]-the market-funded sector (aka for-profit) enrolls a disproportionate share of disadvantaged (low-income and minority) students.

So what are the implications of this evidence? Many of these disadvantaged students come from less affluent families in which financial responsibility is likely not stressed from one generation to the next. They also are much less likely to have parents or peers who have direct knowledge of or experience with the college process, making it harder to navigate the complex world of applying to and funding higher ed. Such students are not likely to fully comprehend the consequences of failing to complete school or not paying their bills. These factors make disadvantaged students more susceptible to dropping out and defaulting on their loans.

Duly noted. But the implication here is that people default because of some ambiguous sense of “financial responsibility… not stressed from one generation to the next.” So students at for-profit schools default because of a lifetime of poverty? Now the financial irresponsibility of the poor may very well be a real thing, but the best way to become financially responsible is to make more money. The fact that more than 20 percent of students from for-profit schools default after three years is not evidence of some carryover bad financial habits from impoverished childhoods; it actually seems to indicate that they don’t make enough money after graduating to pay off the debt they incurred. That means that, in the most basic sense, a school like the University of Phoenix or ITT Technical Institute doesn’t actually work.

Ben Miller over at Education Sector’s the Quick and the Ed takes on this issue directly, pointing out that:

For-profit colleges sell themselves as opening up new doors for students who want to launch a career in any number of fields. Presumably, providing this opportunity should lead to financial betterment and thus justify the expense of paying for the education that makes it possible to obtain that new job. At the same time, these schools then turn around and claim that their students come from low-income backgrounds so in large numbers they will not be able to achieve these dreams and will instead drop out and likely default. So which is it? Either the school can provide this opportunity, or it simply cannot. If it’s somewhere in the middle then maybe they would be better off marketing themselves as kind of a higher education lottery—spend $30,000 at a chance to make it big or lose it all.

For-profit schools are based on the premise that assuming large debt is appropriate for education because it ultimately gives students skills to make the money for that to be a good decision. This is an established concept, one very familiar to anyone who went to, say, law school.

But assuming debt for education is only suitable in preparation for high income professions. Regular schools understand that undergraduate debt is very, very burdensome for low income students, even those who attended very exclusive colleges. This is why many colleges now have policies so that students from low income backgrounds will graduate debt free. This is the very best thing to give students: a free, high quality education.

It may very well be a profitable business model to educate low-income students by saddling them with massive debt but it’s hard to see that as a good model for education.

Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer