With student debt rising to a projected $1 trillion and concerns rising in the Occupy Wall Street movement and beyond about the bursting of the student loan bubble, the new federal consumer protection agency has set a Tuesday deadline for the public to send in data and stories about the rapidly expanding private student loan market—loans students are getting from banks and, increasingly, by for-profit universities such as Corinthian Colleges and DeVry University.
“The private student loan market is one of the least understood credit markets,” wrote Rick Hackett, a staffer for the Consumer Financial Protection Bureau (CFPB) in a blog post at the time the fledgling federal agency first issued its call for information in the Federal Register. “We know there are all sorts of private student loans: some from banks and credit unions, some from schools, and some from other types of lenders. We know that lots of students use these loans every year. But to make sure the market works for students, lenders, and schools, we need a lot more information.”
Collecting such information is crucial for the agency to meet its mandate to answer a long list of questions about the private student loan market. Under the Dodd-Frank financial law, CFPB is required to submit a report to Congress no later then next summer that analyzes a wide range of questions about the private loan market —including its extent, the terms and pricing of the loans, and whether the institutions properly disclose terms to consumers.
Answers to these questions are important, says Deanne Loonin, staff attorney for the National Consumer Law Center. “We would know the scope of private student lending, which we don’t know. That means both the volume of lending but also how much financial distress there is.”
Growth of for-profit private loan market
The skyrocketing costs of tuition and high unemployment rates have increased financial pressure on young people who are graduating with large amounts of debt. For-profit schools are coming under special scrutiny: While they make up just 10 percent of the national student body, growth has almost tripled over the past decade, reports Moody’s.
These for-profit schools rely largely on federal student loan dollars, such as Pell grants, for their revenue—as much as 93 percent of it, according to investigations by a Sen. Tom Harkin, D-Iowa. A federal law known as the “90-10 rule" requires them to collect at least 10 percent of their revenues for each student from other sources other than the Department of Education's direct loans.
This is where the private lending comes in. Before the 2008 financial crash, for-profit institutions would encourage students to obtain loans from third parties, such as student loan giant Sallie Mae, which would then package the loans into securities and sell them to investors. After the crash, this source of money all but dried up, and for-profit institutions began to offer loans directly to students to help make up the "ten percent" part of the 90-10 ratio.
In an analysis of the for-profits' corporate filings issued last January, NCLC's Loonin argued that these institutions do not care whether or not students pay back their private loans from the institutions: "The schools seem to view these loans more as “loss leaders” to keep the federal dollars flowing," she writes.
Loonin also charged that companies also use complex accounting schemes to make their make their investments in student loans gone bad look better on their balance sheets. Corinthian Colleges, for example, subtracts expected defaults from sales, so that losses simply appear as a discount to revenue.
A Corinthian spokesman, Kent Jenkins, countered that the school has been transparent in its reports, and that the school has been actively pursuing programs to lower default rates, which it projects will be lower in the future. Jenkins also pointed out that the school does not make loans to students directly, but rather through an agreement with ASFG, LLC, which is associated with the American Student Financial Group, a company that buys and services student loans.
The company's most recent filing, however, notes that the company records discount payments to that firm as a reduction to revenue.
Bradley Safalow, an analyst who watches the for-profit education sector, argues that the Corinthian retains the risk for these loans and is using the arrangement as a work-around to comply with the 90-10 rule. He makes a similar argument about ITT Educational Services' creation in January 2010 of a loan program called PEAKS through a trust, writing that the company is the "de facto underwriter for all these loans." He also has said the default rate on these loans is much higher than management has acknowledged. Another analyst, Kelly Flynn of Credit Suisse, estimated to the Wall Street Journal that ITT's loans could have as high as a 45 percent loss up front.
The fact is, even something as basic as comprehensive data on default rates for private loans issued by for-profit schools are not available. The federal government publishes default rates on federal student loans here. The national "cohort default rate"–a measure of how many of a school's borrowers enter repayment on certain loans– rose to 8.8 percent in fiscal year 2009, up from 7 percent the previous year. The rate of default at for-profit schools rose from 11.6 to 15 percent at. But this information is based on federal loan data, not private loans.
Among NCLC's recommendations are that private loan data be included in the National Student Loan Data System (NSLDS).
What: Data on private student loans issued by banks and for-profit universities.
Where: Government does not collect currently. The Consumer Financial Protection Bureau (CFPB) is collecting comments and data on private student loans; the deadline is January 17. The Docket number is CFPB-2011-0037, and people may submit comments at regulations.gov, by emailing CFFB_StudentsFedReg@cfpb.gov, or via mail or hand delivery. (Addresses are listed on Federal Register notice.)
Availability: Some information is available via corporate Securities and Exchange Commission filings by for-profit universities.
Usability: No standard format for reporting.