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.

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  35 Comments

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Maryannboomer sooner
Sep 7, 2016 - 2:25pm

@Boomer....

What a fine young man you have. That is a great story and I thank you for sharing it. I love to hear about young people finding their niche. I pray for his safety and that he will flourish in his endeavors. You and his mom have obviously done well.

Dr. P. Metals
Sep 7, 2016 - 6:30am
ChaCha Mars
Sep 7, 2016 - 12:02am

501(c) not-for-profits

The issue of not-for-profit versus for-profit schools has been raised.

Here's a question: Not for *whose* profit?

In many arenas not-for-profits' executives appear to be profiting greatly by their public service.

As one example, in public education it seems the next move after "retiring" from his school district is for every other superintendent in America to start his own education-related not-for-profit. The short version of the plan seems to be to shop vendors he's already doing business with for the school district before retirement, find one who'll donate a check to start his new 501 (c) with, and then "do good" -- for fees and expenses, including fat speaking fees -- in addition to collecting a very generous taxpayer-funded "retirement" income. When the new not-for-profit exec travels it's high end, never Motel 6. The fees and expenses are paid by other school districts headed by ]superintendents counting the days until their own "retirement" when they too can hop on the not-for-profit gravy train. Fortunately Charles Ortel is looking at non-profit record keeping: https://charlesortel.com/

How rampant is this? Right now there are 185 MILLION Googlies for "education" "non-profit." There are only 13,000+ school districts in America.

Double dipping is expensive -- and it's dishonest. Craig raised the point at Finance & Liberty about the need for more honesty in America. If you're going to work, work. If you're going to retire, retire. Don't retire and collect taxpayer-funded retirement -- then continue to hustle more ways to make money from taxpayers -- and try to pass it off as charity.

boomer sooner
Sep 7, 2016 - 12:02am

tyb

I too had reservations, but the positives heavily outweighed the negatives in our case. If a decision was not made to choose a path, short time frame ok, he was going to work for me (oh no not that!). He really didn't like that, but time in would give him a serious leg up to a career.

He has been able to travel abroad (even your current locale) and enjoys new experiences. The AF will give him that opportunity. The plus of AF for his mom, no combat zones. My cousin just retired Army full bird, but had to endure 3 tours in ME. I'm hoping in a few years my son could be stationed back here, maybe working on the AWAC or B1. He is my shooting, camping, jeeping companion. He likes the high country, cliff hanging mountain trails that we travel every summer. I will miss him.

tyberious
Sep 6, 2016 - 11:12pm

@boomer sooner

My nephew is 17 going on 18 in Jan. He's expressed in interest in the military, I have yet to give my approval, as we have crazy people running the government. We did have the "what do you want out of life "talk, and this is when I knew I had influenced him more than I thought, since he was 5 yrs old I gave him an ASE coin every year for his birthday. He said I don't want be like my Aunt, my sister has Cornell undergrad and U Penn, PhD, but is 100k in debt. I agreed, that an education shouldn't cost your future and we discussed how he could achieve his goals.

I will speak with him this weekend, the military is a option. Look I'm on the world largest military base, Hawaii! But having met so many ex-military guys, it's like ex-Mcdondals employees, some do well and others return to what they were doing before hand.

The military can be beneficial for some folks, others it's a way out, a travel plan, some free education, help pay for baby and momma. Please don't get me wrong, I wish we had "No Military" and were like every other long lived culture, all able-bodied men were conscripted or volunteered for 1-2 years military service, like the Swiss or Israel, did I say that?

As a strict constitutionalist I have a problem with the militaristic nation that we've become, but we have noting left!

I hope your boy, enjoys his journey!

Libero
Sep 6, 2016 - 11:08pm

Rickshaw

I can out-grammar you any day . Grammar is not learned in college.

RickshawETF
Sep 6, 2016 - 11:03pm

@Libero

" College is just way to expensive, even the state schools."

That's because in college you learn correct grammar -- as in:

"College is just way to0 expensive, even the state schools."

Just sayin' . . .

boomer sooner
Sep 6, 2016 - 10:29pm

Clinton Foundation

Is a "non" profit organization! Bet they even have an endowment somewhere- How's that working?

My oldest graduated high school last year. Enrolled at the big university in our state. Proceeded to "live" in the dorms and maybe go to class. Judging by his grades, maybe didn't happen. $25k later and we (his mother and me) decided that he needs something different. Her idea was forcing him to live at home and go to school. She was able to get a class this summer out of him, grade was a B. This summer he and I had a good discussion about what I wanted for him, and what he wanted for himself.

He is much like myself. Couldn't stand sitting in class, homework fine, but listening to someone drone about shit I didn't think was useful was unbearable (sorry Dr J). 3 years I struggled, while working and finally moved on. When asked why he even went to school if he wasn't dedicated to "Everyone expected it of me. Mom has a masters, you went, grandpa has a PHD, grandma a teacher" and on.

So.... He joined the Air Force. Ships out the 13th of September (same day as my fathers birthday who he is close with). Scored in the 95%+ on their aptitude test and gets to pick his job. After 2 years "on the job" he gets 50% credit toward an under grad degree. Then the Air Force will pay for the other 50% while still performing his duties. Initial is a 6 year stint. He loves flying and working on electronics & mechanical. He has been working for one of my customers the last 3 years on breaks/summer who is a sub for Boeing. Radio repair, battery refurb, pilot seat rehab. Hell, his first job with them was procurring new printers for AF1, as a junior in high school!

He is on cloud nine and ready to go. Several friends, customers and extended family are retired AF and we talked to as many as possible to find out the pros and cons. A very good friend is a retired Colonel (hard money advocate). He was instrumental in the overall comfort level for us that this was a good decision.

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silver66
Sep 6, 2016 - 10:11pm

Fred H

I like the cut of your jib !!

well stated

silver66

Fred Hayek
Sep 6, 2016 - 9:16pm

I don't get the antipathy for the concept of a for profit u

I find that I should have read all the posts before writing as Libero has a similar take on the lack of real distinction between the for profit and saintly non-profit schools.

How different are the non-profit universities? Take all the state and otherwise gov't sponsored schools. Is there some saintly altruism going on there or are they socking it to the students and taxpayers just as much as necessary?

Would ITT be any better if it was officially non-profit? What would be involved there, just some structural changes so that the money went to the same people it went to before but with the school officially not making a profit. If, instead of making a profit of $5 million they spread $5 million around to the same dozen owners, is it then good?

Look at your typical non-profit university or college it's comically overstaffed in administration and complete hacks get massive compensation as deans or chancellors. That's where a lot of what would have been profit went. Did that make the non-profit university good somehow? Pffew! We would have made a profit! That would have been terrible! Instead we hired three times the administrative staff that we need and we gave million dollar no show jobs to a half dozen retired politicians from our state. Pffew!

ITT Technical institute set up as a non-profit is not somehow immediately good, is it?

Sorry for the rant.

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