Friday, August 20, 2010

Subprime Education Scam: Guaranteed by Government

At a time when the country is getting ready to gut Social Security, Pensions, .... Here is the way our government husbands its resources.

Winkler, Rolfe. 2010. "For-Profit Schools Put in Detention." Wall Street Journal (21 August)

Early death reports are known to be exaggerated. For-profit educators' may be an example. With Congress and regulators threatening to cut off federal funding, share prices for the industry's top six by market capitalization have dropped by an average of 40% since May. From 2000 to 2009, the industry grew explosively, thanks to increased government spending and Bush-era deregulation permitting aggressive sales tactics. Taxpayer-guaranteed loans and grants flowing to the industry more than quintupled during those years, to $26.5 billion from $4.6 billion."

"Earning risk-free profits on taxpayer-guaranteed loans tends to lead to lower lending standards. Such is the case with firms like Apollo Group, ITT Educational Services and Career Education. They often market to low-income prospects -- eligible for the most aid -- and sell them high-priced degrees, maximizing government largess."

Here is the URL for the GAO study:

I will post some more on this later:
Here is the rest of the Wall Street Journal article:

"ITT's two-year associate degrees can cost as much as $47,000, estimates Kelly Flynn of Credit Suisse. Yet the average starting salary for employed graduates -- 73% of 2009's class found jobs by April -- is only "slightly north" of $30,000, says the company. So default rates are high: 24% so far for loans extended in 2007. On some loans ITT extends itself, the company may assume close to a 45% loss rate up front, Ms. Flynn estimates."

"But losses on loans matter little for the companies. Since 85% of ITT's 2009 revenue came from government funds, taxpayers will suffer the deepest financial wounds. Government revenue for Apollo and Career Education in 2009 was 86% and 80%, respectively."
"Proposed regulations would, among other things, cut off government funds if new tests show the debt burden on students is too high relative to post-graduate earnings. Data released by the Department of Education suggest that, to pass the tests, schools may have to cut tuition significantly. Meanwhile, on Capitol Hill, Sen. Tom Harkin may introduce tough reform legislation after the Government Accountability Office exposed the industry's hard-sell tactics."

"The latest push by schools is to target veterans, whose benefits let for-profit institutions skirt a rule that 10% of sales come from nongovernment sources. Strangely, such benefits count as nongovernment. The top five schools enrolling veterans are for-profit."

"Increased scrutiny will rightly keep the industry in detention for the moment. Although some appear cheap -- Apollo, Career Education and ITT trade at an average of six times 2010 estimated earnings -- it is risky to capitalize future profits that could be legislated away."

"And yet, just as Washington is now helping to crush the stocks, it is also likely to be what makes their longer-term survival likely. For the government to meet its goal of substantially increasing college graduates by 2020, it will need the for-profit sector. One example: Veterans Administration education benefits will increase to $9.5 billion this year from $4.2 billion. The financial aid gravy train that for-profit schools have so adeptly ridden is set to keep rolling."

No comments: