Who Bears The Risks Associated With For-Profit School Tuition?

You do.  I do.  All taxpayers do.  And who gets the rewards?  The for-profit schools, and sometimes their students.

For-profit schools have been criticized for “privatizing profit and socializing risk.”  This means that once the school gets the student’s tuition, the money is its to keep.  Tuition refund schedules are often front-loaded, so that by the time students decide the program is not what they expected, they get little or none of their money back.  They are still obligated to repay their loans, however, and if they default, taxpayers cover the bill.  The school has little risk once it pockets the cash; all of that shifts to students and taxpayers.

I have seen a spirited defense of this criticism by a for-profit school industry stock analyst.  He says “I am confused, if the student is stuck with the student loan for life, how can the government and taxpayer be on the hook?”  Simple.  The government has to make good on the loan if the student defaults.  It can then seek to recover the money it paid from the student, but even if it succeeds, this is going to take time.  The money it never collects is a loss to taxpayers.  But, since there is no statute of limitations on collecting student loans, the government can pursue the student to recover its money – forever.  The misery never ends for the students, and collection is a continuing frustration for the government.  While all of this is going on, the schools are enrolling more students with more federally-guaranteed loans.

This analyst assumed away this reality by stating that the government collects $1.20 for every $1 it lends.  If that were true, Sallie Mae wouldn’t be hemorrhaging money, the whole gainful employment controversy would be a lot more muted, and our current budget crisis would probably not be as bad.  The fact of the matter is that the schools take on little risk, the government takes on a monetary risk, and the student takes on the risk of defaulting and being hounded by collectors for an indefinite period.  Shouldn’t some of this risk be put back onto the schools?  Let’s try and get THAT discussion going.

Leave a comment

* Required field


Law firm website design by Rowboat Media