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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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.

LiberoCalifornia 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.

NW VIEW
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

pauleberhart
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.

YMMV

Sep 6, 2016 - 6:21pm

NW

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!

Maryann
Sep 6, 2016 - 5:48pm

@NWV....it'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!

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Sep 6, 2016 - 5:43pm

@Libero

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.

Libero
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.

Liberotyberious
Sep 6, 2016 - 5:27pm

Tyberious Really??? GMO's???

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

JackPutter
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.

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