An Outrage!  But for Whose Benefit?

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:

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


Sep 6, 2016 - 2:04pm


Thanks CL for the insight.

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.

Sep 6, 2016 - 2:59pm


Timely piece! It's a slow protracted decline.

Sep 6, 2016 - 3:00pm


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...

Libero Joseph 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.

Sep 6, 2016 - 3:47pm

I think you meant...

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

Sep 6, 2016 - 3:50pm

Turd -used fed short for federal government

and not be confused with federal reserve as you noted.

Sep 6, 2016 - 4:23pm

Gov't guaranteed loans....

I attended dental school in the 80s with close to $100K in loans upon graduation. I thought that was bad! Kids today are surpassing that easy for 4 year undergraduate degrees. It took me years to get on top of my loans. Reagan Admin loans. Was a nightmare. Could deduct interest on 12.5% loans in the beginning, but Ronny didn't let that continue. He took away the deduction! Why not get students to do the heavy lifting? This was the beginning of our tax structure, getting the middle class to assume the tax burden. Not much has changed.

My debt has been paid off, but it was painful. Couldn't get a home loan for ages! I was in default for a few years. Let me tell you, there is no structure in place to help you if you fall into default on these loans. Kids today will go into default and have no way to repay these debts. Credit will be crushed as a result. These ITT students are screwed. I'm guessing these kids are mostly poor to middle class. Parents couldn't help them, but Uncle Sam could! They never had a chance. I'm fortunate, but not all get the breaks I did.

Sep 6, 2016 - 4:45pm

Why are there for profit

Why are there for profit universities? Why is the government in the business of making student loans? The cost of inflation in higher education is just outrageous, and that's a separate issue from these sham for-profit universities that pray on people who don't know any better.

Sep 6, 2016 - 4:50pm

Loans & interest

Do not forget along with not having a decent job to pay for the Mandatory repayment loan, the loan will jump with the 7 percent rip off interest.

Sep 6, 2016 - 4:52pm



The Seralini study concluded, “In females, all treated groups died 2–3 times more than controls, and more rapidly. This difference was visible in 3 male groups fed GMOs. All results were hormone and sex dependent, and the pathological profiles were comparable. Females developed large mammary tumors almost always more often than and before controls; the pituitary was the second most disabled organ; the sex hormonal balance was modified by GMO and Roundup treatments. In treated males, liver congestions and necrosis were 2.5–5.5 times higher. This pathology was confirmed by optic and transmission electron microscopy. Marked and severe kidney nephropathies were also generally 1.3–2.3 greater. Males presented 4 times more large palpable tumors than controls…”

Four times means four hundred percent more large tumors in GMO fed rats than in normally fed ones of the control group. Moreover, the Seralini study reported, “By the beginning of the 24th month, 50–80% of female animals had developed tumors in all treated groups, with up to 3 tumors per animal, whereas only 30% of controls [non-GMO-fed—w.e.] were affected. The Roundup treatment groups showed the greatest rates of tumor incidence with 80% of animals affected with up to 3 tumors for one female, in each group.”

NW VIEW Doctor J
Sep 6, 2016 - 4:54pm

@ Dr. Jerome

I have learned one valuable lesson this school year. I have always noted that the majority of college grads will never find work in their major. We told our kids when they were off to college, long ago: "We will pay for all of your college expenses with only one requirement. Your major must be in an area that will produce employment in your major or we will not pay." Our son did not want to go to college and started working full time with me in home construction and he could have retired before he was 40 but loves working. Our daughter finished her two year degree, couldn't decide on a major, quit, married a wonderful man and they own a local real estate company with several other businesses and are making huge fiat.

Then the grandkids came along in time. We told them the same things as did their parents. Well Dr. J. then we had an unusual event. One granddaughter graduated from a local J.C. and high school in the same month with a 4 point average. She loves the arts, singing and the local plays. She can really sing. My son and I could see that this was going to be a problem unless she sang on a street corner but he was not going to pay big fiat for two more plus years of arts. This is where even an old man can learn a lesson. A great private college found out about her and had seen her in one of their plays as a singer. She applied to enter this school as a jr., only about 2 months ago. This place is expensive. They ran her through their system and quickly. They gave her a $65,000,(she did not apply for anything), 4 year scholarship and an additional one for being a 4 point student. She has set her goals on being like you Dr. Jerome and teaching at the college level in time. Yes, we learned a valuable lesson. Jim

Sep 6, 2016 - 5:07pm

Most Schooling that have tuition loans also.....

have grants attached. Those grants (grants do not get repaid in the normal sense) add up fast to make things happen as far as access goes. I'm not at all sure what the precentage of total tuition is covered. Remember also that the student loans are the only loans (other than mob loans) in the world that cannot be defaulted through bankruptcy courts.

I can go get a mortgage at around 3-4 percent. Yet the schooling loans don't have to compete with the commercials because of legal issues and charge much higher rates.

As a student you can also be approved for credit cards, auto loans, and food and housing loans that all can be stacked into the total bill that cannot be defaulted on.

Libero tyberious
Sep 6, 2016 - 5:27pm

Tyberious Really??? GMO's???

Did you read the title of the thread and subject of every post?

Sep 6, 2016 - 5:41pm

Jackputter et al

The federal Stafford loans max out at $7000 per year (I think). Anyone can get these. I know interest rate jumped recently to 7% which is highway robbery, but they used to be reasonable around 4%. Then a student/parent can go to bank and take out additional loans to cover costs (buyer beware).

College is just way to expensive, even the state schools. Room and board charges are like you're staying at a luxury hotel.

Just got through putting both girls through college so now I can breathe.

Sep 6, 2016 - 5:43pm


Govt subsidy of tuition incentivizes malinvestment.

Some students absolutely thrive with student loans. They are why the program exists. They cannot otherwise afford to attend college, and without some help paying for it, they do not go. Hence, the good idea of having the govt guarantee the lender repayment in the event the student defaults.

But, like any govt program, abuses can and do occur from the perverse incentive structure that is built into the programs.

For example, if the govt subsidy paid only a portion, and not all, of the defaulted loan, perhaps there would not be so many students admitted.

Or, if the curriculum for which the govt guaranteed repayments were limited to hard sciences, or if the school was on the hook for the first 50% of the loan, perhaps there would not be so many enrollees.

The point is that BECAUSE of the incentive structure, ITT built its business model being a FOR-PROFIT school. This is totally insane!

The govt basically created a perverse incentive structure, for which ITT, Corinthian, and others [which the article does not mention, but do a google search and see for yourself] readily participated in.

Now that the govt decided to crack down somewhat on the scheme, ITT is crying bloody murder. Boo hoo.

The real shame is the kids who have those student loans will either never repay them, thus damaging their ability to obtain credit in the future, easily the biggest harm, and also remember that defaulting on a govt obligation prevents one from obtaining Social Security payments down the road!

The govt's allowing ITT and others to be a for profit school, while incentivizing debtors/students to incur tens of thousands of loans is the real problem. No one in govt will go to jail, or ever be held accountable for this horrible outcome.

Sep 6, 2016 - 5:48pm's the work ethic....

Your children and granddaughter are to be commended. Something very similar happened to my son who got a full four year scholarship that includes room and board. He is an "artsy" kid as well who is getting a degree in a program that combines cutting edge technology and communication. He has his own business as well, but he still worries he won't be able to support a family someday. I tell him he will be fine. Any employer will love him for his work ethic. Skills can be learned but a responsible employee is a jewel. Personally I think he will be his own boss. He earned the right to major in the degree of his choosing.

A friend of mines daughter, like your granddaughter, got a music scholarship to a small private school and she is also getting a teaching degree. The instrument she practiced so hard on for many years paid her way.

For kids who don't get scholarships, I think community college or trade schools are fantastic options, if they are paid as you go or very small reasonable loans are obtained. Large loans are millstones around the necks of young adults.

Edit: I think I've told this story before, if so, my apologies. I'm a proud mama!

Sep 6, 2016 - 6:21pm


Teaching is the best career that many Liberal arts or Humanities students can get into, but it increasingly requires a PhD or other terminal degree (MFA in your grand daughter's case?). Competition is heavy for teaching positions in colleges, but perhaps no moreso than in accounting or engineering.

But to have to pay off 150K in student debt makes teaching an impractical career choice... Do the math kids. My daughter has a "Goth" friend, dresses all in black and spends her time making chain mail. She is getting a psych degree--trying to figure herself out. Her parents will not support her goals, won't even buy her clothes to wear while away at college. She is smart and will graduate with a Psych degree one day, but she'll be paying of the equivalent of a nice home in many markets as she tries to make ends meet.

My own daughter loves critters and is studying biology. I think she will make it. So far, no debt. A blend of scholarships, Dad's discount, pell grants, and Dad's summer teaching checks are getting it paid for with no debt.

My son borrowed a student loan in 2011 and bought silver with it--cost average about $35 per ounce. He is paying on the debt, but still has all the silver. it all Looks like I steered him wrong... ooops.

I feel bad for these kids. I taught our Senior capstone class last semester. I could tell who was going to find work and who will struggle by the quality of their projects and simply the way they interacted with me and the other students--perhaps 30-40% will struggle.

I'm going to have to go teach harder!

Sep 6, 2016 - 6:37pm

First Hand Experience

Begin Hypothetical Rant:

Paul Eberhart attends Western Technical Institute (Private, For-profit $42,000 2-year program).

Why would he go to community college on the government's dime?

After all, he did hypothetically risk getting blown up hauling the same damn generator around Iraq on four occasions for Misters Kellogg, Brown, and Root (.gov pays good in a combat zone ya know, so just create missions and give away some yellow ribbon car magnets as needed).

VA education benefit will pay up to "X". WTI charges "X+1". WTI offers discount of "1" for being disabled vet. WTI perpetually extracts every single penny from .gov, and Paul gets a cool HP laptop with quad-core i7 and a backlit keyboard to boot.

"what difference does it make?" as they say. Hope this makes you feel better.

Paul highly recommends the Martenson/Kuntsler podcast on racketeering. He recommends doing your part to quicken the the end of this failed experiment and subsequently fight for a gold standard, preferably returning to the original definition of a dollar.

-End Hypothetical Rant.


Sep 6, 2016 - 6:46pm

@ Dr. Jerome again

Do you remember the old days when we worked our way through high school and jr. college? (You may be too young). I remember those days like it was just weeks ago. We always had a job after school: washing dishes, pumping gas at freeway stations and even checking your oil and washing those bugs off the windows.

I finally received my AS in engineering and moved from home to the big city. Homeless and broke. I knew if I could make it through the first month that I would be set for life. I borrowed enough money to stay in a room in a flea bag hotel down town and ate my meals at my soon to be wife's home.

Yes things are different today and so is the inner drive of the modern youth. My grandson is entering the UW this month as a Jr. in electrical engineering and his first class in in calculus 4. Yes, I am thankful for the drive within the family and also that I have thrown away my slide ruler.

There are many areas, locally, that one can make six figure incomes without any college. However, the modern youth have not understood the value of knowing how to work. I see fiat trees popping up everywhere . However, I just like picking the fruit of my organic garden these days. Jim

Libero California Lawyer
Sep 6, 2016 - 7:09pm

Hay Cali @5:43 PM

It is my understanding that the government holds the loan, the college is paid up front, and the govt. can attach wages and pursue the non-payment of the loan. Recently, there has been legislation that will adjust repayment of these loans based on the ability to pay (don't know if it passed).

What I know is that my daughters wouldn't have attended their preferred colleges if they could not get these govt. Stafford loans. They are honest and will repay these loans. When you hear about students having $100,000 of debt or greater when they graduate, I believe that these are not all government loans, the Stafford only allows a max of $7000 per year, but I guess these loans are also available for graduate school.

That a Stafford loan applicant is guaranteed the loan opens the door to more defaults than if it was a bank loan subject to credit check and/or parental co-signing.

As for profit and non-profit colleges. To me they are the same, these non-profits have huge endowments, gobble up real estate like any entrepreneur (and then these properties are taken off the tax base for local governments), then buy and sell them tax free, pay huge salaries for administration, and take alumni contributions and use less than half for student scholarship, and mostly to build top expensive research facilities and pay high salaries to lure top scientist, and then sell the patents for more profit.

Most so called non-profit colleges are just the same as ITT.

I believe that if the Stafford loan program did not exist, that students and their parents would pursue private bank loans and the default rate wouldn't change much and the cost of college would remain the same.

indiana rod
Sep 6, 2016 - 8:01pm

Student Loans

The Indianapolis Star reported that the ITT Federal student loans may be forgiven. It seems there was a law that ITT violated that would make this possible.

There are ITT originated loans that will not be forgiven.

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.

Sep 6, 2016 - 10:11pm

Fred H

I like the cut of your jib !!

well stated


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.

Sep 6, 2016 - 11:03pm


" 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' . . .

Sep 6, 2016 - 11:08pm


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


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