An Outrage!  But for Whose Benefit?

35
Tue, Sep 6, 2016 - 1:50pm

For-profit ITT Technical Institute shuts down, leaving 40,000 students in limbo, and adding 8,000 to the unemployment rolls. Oops, this was not the narrative that was supposed to happen.

This just in from zerohedge:

https://www.zerohedge.com/news/2016-09-06/40000-students-limbo-8000-employees-fired-itt-suddenly-shuts-down

ITT Technical Institute, a for profit educational institution, is, according to them, forced to shut down after the federal government basically shut off the flow of government-guaranteed tuition. ITT whines: “the actions of and sanctions from the U.S. Department of Education have forced us to cease operations of the ITT Technical Institutes, and we will not be offering our September quarter.”

So, with this in mind, let us examine the incentive structure, and see if we can learn any lessons.

ITT was a for-profit school. That means they had an incentive to enroll students, that is, their profits increased from a greater number of students. In a normal world, one without incessant government intervention and malinvestment, a prospective student would size-up the burden benefit analysis of attending ITT. It is simple: what does it cost to graduate, versus what are the job prospects, including expected starting salary, upon graduation? If the costs far exceed the benefits, the rational student would not pay the tuition, and would find something alternative to do, like interning for free, taking classes part time while working part time, going to a state run community college, going to a shorter trade school, or perhaps foregoing school altogether and entering the workforce in whatever capacity was available.

But, in this government-ruined economy, the incentive structure is hopelessly out-of-kilter. Job seekers, with no hope of actually getting a job due to QE and the economic disincentives in place, find solace in the hope of having good ol’ Uncle Sam paying the tuition for a private, profit incentivized school. So long as Uncle Sam is paying the bill, who cares!

So, with the incentive structure in place, the feds incentivize unemployed potential workers into incurring tens of thousands of dollars in interest-bearing loans, which create massive demand for slots in school, which the for-profit schools gladly meet by charging higher and higher rates, none of which would be possible without government intervention. See, if the students did not see a benefit, or if the govt did not offer subsidies, then there would be NO burgeoning demand, and hence, far less supply of seats at the for-profit schools. Without excessive demand, there would be alignment between the tuition rate charged, and the expected benefit the graduating student hopes to obtain. That is, unless the school could show incoming students WHY paying tens of thousands of dollars was a good thing, by say, showing the employment statistics of recent grads, including type of work, salary, and benefits,then no rational student would incur tens of thousands of non-dischargeable debt!

But, the government, always eager to manipulate things, operated exactly as one would expect. Those in charge, want to stay in charge, and take actions consistent with that goal. Allowing unemployment numbers to skyrocket would reveal the failures of their ideas. They could not have that happen, so of course, the incentive structure was in place for govt to dramatically ignore warning signs at the for profit schools. Despite years of complaints, the government kept funneling money to the for profit schools despite low graduation rates, and low employment rates for those managing to graduate. Eventually, the regulators had to step in, as the cacophony of complaints began to resonate.

Let us also appreciate that the for-profit schools are at the margin. They acted completely within their incentive structure. So long as the govt was guaranteeing the tuition, then they would sign up ANYONE who could fog a mirror.

Does this not look EXACTLY like subprime mortgages?

The government decided, in their wisdom, to incentivize private mortgages, through fannie mae and freddy mac. This was helped as well by the fraud and scam we all know as collateralized debt obligations. What the government did, was fabricate demand, and then subsidize it. When it came time to pay, the demand collapsed, along with supply, and voila, economic disaster.

ITT complains about due process. For this a give a hearty laugh. What about the due process of the kids who incur tens of thousands of dollars in loans, non-dischargeable, only to leave school with no job, no prospects of any real job, and with enormous student loan payments they have no chance of paying off? Why is ITT so beholden on govt handouts? Why cannot they survive on students paying their own way? Why does the government have to subsidize tuition for their school? How much does it really cost to train a student to perform the skills one would receive by graduating? Where is the outrage against ITT, and by extension, against the government for allowing this tragedy to occur in the first place?

So, what have we learned?

So long as the government is subsidizing anything, there will be economic malinvestment. What price will be paid by those caught up in the mess?

The traditional, not-for-profit universities and colleges, although not as immediately likely to be affected, are also going to caught in this economic reality at some point.

If the government stopped subsidizing student loans, plenty of schools would close, simple as that.

See this for what it is, a sign of weakening around the exposed margins.

Prepare accordingly.

About the Author

  35 Comments

Gramp
Sep 6, 2016 - 2:04pm

Uno!

Thanks CL for the insight.

jaw777
Sep 6, 2016 - 2:40pm

Cali Lawyer

Well said as always. I have been fortunate enough to have this conversation with my kids before they borrowed anything for college. They both chose schools that offer them the chance with a little work to graduate debt free and degrees that should pay (nursing and computer science).

I have been saying for a long time that high cost D-1 schools shouldn't even be allowed to offer degrees for teaching certificates or art history and the like. It is a terrible investment. And anyone willing to pay $40k a year for a degree in education should NOT be allowed to teach my kids. They aren't smart enough.

tyberious
Sep 6, 2016 - 2:59pm

CL

Timely piece! It's a slow protracted decline.

RickshawETF
Sep 6, 2016 - 3:00pm

Fourth

Fourth -- sorry, Marchas . . .

Oh, and keep stacking!

Joseph Warren
Sep 6, 2016 - 3:16pm

Thanks CA Lawyer

for this article on an aspect of the 'education' bubble.

So many college programs today just pass out credentials. They don't teach any content that's worthwhile. If I was a young kid today, I might go into an electricians apprenticeship program. I'd get a broad liberal education by reading classics on my own & joining small discussion groups. I could do the the later for practically free. All it takes is a library card.

indiana rod
Sep 6, 2016 - 3:32pm

ITT Closure

J W has a good point.

Reading the comments of the Zero Hedge is very interesting and gives a good picture of what's wrong with America.

Sep 6, 2016 - 3:39pm

Important issue

Traditional colleges may be next to face the popping of this bubble. I have to wonder how many of my own students have career jobs waiting for them after graduation. Seems to get tougher each year, as I communicate with graduates. My son, with a BA degree, is the night manager of a hotel in town. A decent job, but far from his interests in psychology and literature. He put in a great deal of effort (and 5 years of his life). His coworkers do not have a degree.

I wonder if ITT processed the fall tuition into its coffers before they closed the doors? The DOE told them no more new students on Aug 25, just a few days before classes began. Does that mean ITT is pocketing fall tuition of the continuing students which had surely been processed already?

Company statement does not say...

LiberoJoseph Warren
Sep 6, 2016 - 3:43pm

So For-profit ITT Technical Institute

sucks and the fed will no longer allow students to use student loans to attend there... but the fed is to blame???

So if the fed continued to provide student loans for students to attend there... it would be okay???

Reminds me of Dr. Jerome's masterpiece, Damned if you do, Damned if you don’t. Weird.

Added: Cali, you quoted wrong, the article refers to students "use federal financial aid" and no mention of your reference to " the flow of government-guaranteed tuition." Please correct me if I'm wrong.

Libero
Sep 6, 2016 - 3:47pm

I think you meant...

"Fed's" not "Fed"...as in it's the federal government's fault, not the Federal Reserve.

Libero
Sep 6, 2016 - 3:50pm

Turd -used fed short for federal government

and not be confused with federal reserve as you noted.

Key Economic Events Week of 11/11

11/12 Three Fed Goon speeches
11/13 8:30 ET CPI
11/13 11:00 ET CGP on Capitol Hill
11/14 8:30 ET PPI
11/14 Four Fed Goon speeches
11/14 10:00 ET CGP on Capitol Hill
11/15 8:30 ET Retail Sales
11/15 8:30 ET Empire State Manu Index
11/15 9:15 ET Cap Ute and Ind Prod
11/15 10:00 ET Business Inventories

Subscribe or login to read all comments.

Contribute

Donate Shop

Get Your Subscriber Benefits

Private iTunes feed for all TF Metals Report podcasts, and access to Vault member forum discussions!

Key Economic Events Week of 11/11

11/12 Three Fed Goon speeches
11/13 8:30 ET CPI
11/13 11:00 ET CGP on Capitol Hill
11/14 8:30 ET PPI
11/14 Four Fed Goon speeches
11/14 10:00 ET CGP on Capitol Hill
11/15 8:30 ET Retail Sales
11/15 8:30 ET Empire State Manu Index
11/15 9:15 ET Cap Ute and Ind Prod
11/15 10:00 ET Business Inventories

Key Economic Events Week of 11/4

11/4 10:00 ET Factory Orders
11/5 9:45 ET Markit Services PMI
11/5 10:00 ET ISM Services PMI
11/6 8:30 ET Productivity & Labor Costs
11/6 Speeches by Goons Williams, Harker and Evans
11/8 10:00 ET Consumer Sentiment
11/8 10:00 ET Wholesale Inventories

Key Economic Events Week of 10/28

10/30 8:30 ET Q3 GDP first guess
10/30 2:00 ET FOMC fedlines
10/30 2:30 ET CGP presser
10/31 8:30 ET Personal Income & Spending
10/31 8:30 ET Core Inflation
10/31 9:45 ET Chicago PMI
11/1 8:30 ET BLSBS
11/1 9:45 ET Markit Manu PMI
1/1 10:00 ET ISM Manu PMI

Key Economic Events Week of 10/21

10/22 10:00 ET Existing home sales
10/24 8:30 ET Durable Goods
10/24 9:45 ET Markit flash PMIs
10/24 10:00 ET New home sales
10/25 10:00 ET Consumer Sentiment

Key Economic Events Week of 10/14

10/15 8:30 ET Empire State Fed MI
10/16 8:30 ET Retail Sales
10/16 10:00 ET Business Inventories
10/17 8:30 ET Housing Starts and Bldg Perms
10/17 8:30 ET Philly Fed MI
10/17 9:15 ET Cap Ute and Ind Prod
10/18 10:00 ET LEIII
10/18 Speeches from Goons Kaplan, George and Chlamydia

Key Economic Events Week of 10/7

10/8 8:30 ET Producer Price Index
10/9 10:00 ET Job Openings
10/9 10:00 ET Wholesale Inventories
10/9 2:00 ET September FOMC minutes
10/10 8:30 ET Consumer Price Index
10/11 10:00 ET Consumer Sentiment

Key Economic Events Week of 9/30

9/30 9:45 ET Chicago PMI
10/1 9:45 ET Markit Manu PMI
10/1 10:00 ET ISM Manu PMI
10/1 10:00 ET Construction Spending
10/2 China Golden Week Begins
10/2 8:15 ET ADP jobs report
10/3 9:45 ET Markit Service PMI
10/3 10:00 ET ISM Service PMI
10/3 10:00 ET Factory Orders
10/4 8:30 ET BLSBS
10/4 8:30 ET US Trade Deficit

Key Economic Events Week of 9/23

9/23 9:45 ET Markit flash PMIs
9/24 10:00 ET Consumer Confidence
9/26 8:30 ET Q2 GDP third guess
9/27 8:30 ET Durable Goods
9/27 8:30 ET Pers Inc and Cons Spend
9/27 8:30 ET Core Inflation

Key Economic Events Week of 9/16

9/17 9:15 ET Cap Ute & Ind Prod
9/18 8:30 ET Housing Starts & Bldg Perm.
9/18 2:00 ET Fedlines
9/18 2:30 ET CGP presser
9/19 8:30 ET Philly Fed
9/19 10:00 ET Existing Home Sales

Key Economic Events Week of 9/9

9/10 10:00 ET Job openings
9/11 8:30 ET PPI
9/11 10:00 ET Wholesale Inv.
9/12 8:30 ET CPI
9/13 8:30 ET Retail Sales
9/13 10:00 ET Consumer Sentiment
9/13 10:00 ET Business Inv.

Recent Comments

by Blackwatersailor, 28 sec ago
by Marcus, 1 min 49 sec ago
by lakedweller2, 28 min 37 sec ago
by lakedweller2, 41 min 1 sec ago

Forum Discussion

by CongAu, 2 hours 13 min ago
by UncleFester, 2 hours 30 min ago
by Green Lantern, 4 hours 53 min ago