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Borrowing Too Much For A Worthless Degree


Many have criticized the value of a U.S. college degree in recent decades, especially from for-profit colleges. In most cases under scrutiny, these institutions are vocational programs, which target lower-income individuals.

Although for-profit colleges have gained attendance—accounting for 42 percent of post-secondary education enrollment growth in the last 10 years—poor educational outcomes, low job placement rates, and high debt accumulation have raised many red flags.

In addition to negative media attention in recent years for delivering poor job prospects and high debt, for-profit colleges are now also under fire from the U.S. Department of Education (DOE). In 2014, the DOE proposed the Gainful Employment Regulation, an update from legislation in previous years aimed at protecting Americans from false promises of educational and job attainment.

The 2014 proposed rule sets out two metrics for “gainful employment,” primarily targeting for-profit institutions (both degree and non-degree granting) with Title IV eligibility on the line if both were not met. Originally, the metrics included: 1) a debt-to-earnings metric for students, and 2) a program cohort default metric rate. However, the Obama administration dropped the student loan default metric before the final rule was released in October.

A Worthless Degree By The Numbers

Two million students are currently enrolled in for-profit institutions, which on average cost about $12,000 more per year than other two-year institutions and $6,000 more per year than four-year institutions. Therefore, of those for-profit students who graduate, 90 percent have student loans, with the average loan amounting to $40,000.

Findings from academic research suggest that employers do not value for-profit credentials any more than community college credentials.

To make matters more concerning for those graduates, findings from academic research suggest that employers do not value for-profit credentials any more than community college credentials, despite the higher cost. This directly impacts the astounding data indicating that defaulting on a student loan is nearly four times higher for students from for-profit colleges than community colleges.

Yet, the U.S. Education Secretary Arne Duncan recently praised a number of for-profit institutions, namely Kaplan Inc. and The University of Phoenix, for their efforts to introduce scholarships and for offering free trial periods. Despite this, other for-profit institutions are under fire for manipulating student information to generate even more revenue and avoid penalties.

The Institute For College Access And Success, in its May 2014 letter to the DOE, claimed that, “evidence is clear that some colleges are manipulating their cohort default rates by putting former students in forbearance during the window when default rates are being measured regardless of whether it is in the borrowers’ best interest to do so.”

Six months goes very quickly after one graduates from college. There are so many changes to daily living, most often involving applications, moving, and new jobs. However, that six-month window is all one gets before the notifications start coming that it is time to begin repaying student loans. From 2005 to 2012, average student loan debt has jumped 35 percent, while the median salary has dropped 2.2 percent, according to the New America Foundation.

Repayment Options—Or Lack Thereof

Alternatives to out-of-pocket payment, traditional student loans, and scholarships exist, though, and they are on the rise in the United States. For example, Income Share Agreements (ISAs) are a financial model in which individual investors or the government can give money to students and in turn get a portion of such students’ future earnings.  Milton Friedman first proposed these plans in the 1950s, but people have only now begun to use them, after they gained a lot of attention when Sen. Marco Rubio and Rep. Tom Petri introduced legislation that defines and promotes the idea.

Individual investors or the government can give money to students and in turn get a portion of such students’ future earnings.

Most students find it beneficial to consolidate their various loans into one or two monthly payments. Consolidation usually results in one lender combining (and taking responsibility for) all loans. Then, a borrower is only responsible for one monthly payment to one lender, often at lower, fixed interest rates.

The advantage of a fixed interest rate is that no matter what happens in the market, the person responsible for paying a loan back knows the fee each month over the life of the repayment. However, due to fluctuations in interest rates, studies have found that over time those who choose a fixed interest rate will end up paying more.

Variable interest rates on the other hand, are tied to an underlying financial benchmark. While interest rates are presently at all-time lows, and therefore appealing to borrowers, they are indeed “variable.” This means if interest rates go up in the United States, so too will the monthly loan payment, making everything more costly. If interest rates increase once—or several times—over the life of a loan, monthly payments could become excessively high; often too high for an individual or family to repay.

The American Enterprise Institute also suggests that people develop new financing approaches to reduce the risk on taxpayers by requiring loan seekers to put up private capital in turn for education. There lies the ultimate risk. If not paid in a timely manner, lenders, including the federal government, can garnish wages, which can lead to bankruptcy. Worse, missing even one payment can hurt your credit score.