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 - 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 - 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.”

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 - 4:45pm

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 - 4:23pm

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 - 3:50pm

Turd -used fed short for federal government

and not be confused with federal reserve as you noted.

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.

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.

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...

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.

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