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We Asked an Expert About the Corinthian College Student Loan Debacle

Screen Shot 2015 12 10 at 4.54.31 PM
Screen Shot 2015 12 10 at 4.54.31 PM

On December 3, the federal government announced it’s forgiving tens of millions of dollars in loans owed by former students in the Corinthian College system. GenFKD reached out to student debt expert John Pelletier, Director of Champlain College’s Center for Financial Literacy, for his take on the news.

As Pelletier explains, the problem isn’t necessarily for-profit colleges unto themselves, but that there is no oversight whatsoever in the federal student loan process.

What makes this debt forgiveness decision unique?

The first thing to look at is the “borrower’s defense” claim. It’s rarely used to begin with, it’s only in there statutorily. From what I can see not too many folks have ever used it.

You have a unique situation here where a college went belly up. I don’t believe there is general knowledge of students about this “borrower’s defense” plan. I think they know there is forbearance and general aspects of student loans that exist out there, but I don’t think they know specifically about this claim.

They know deferment and military options. The key things folks know are that they have these different repayment options, maybe loan consolidation, forgiveness programs, etc.

What’s really interesting is that the focus is moving. What people are worried about isn’t what kind of college you’re going to, it’s whether you have a hard time getting a job after you graduate.

Are for-profit schools the obvious bad actors here?

The for-profits probably look worse than state-funded, but it’s conceivable that some community colleges are not great either.

It comes down to default rates and there are certain schools that are way up there in default rates and tremendously poor job outcomes so people can’t repay their debt. Saying, “For-profit bad, not for profit good,” is too simplistic and doesn’t solve the issue.

Personally I’m not convinced that all for-profit schools are evil with no educational purpose. Maybe that’s the capitalist in me that says I’m unwilling to blame for-profit schools entirely.

But the difference is if you’re going to give money to profit making institutions, the question is how you regulate the distribution of that money to maximize your public policy goals. There is little to no teeth that have been put on these organizations.

What is the underlying problem in the student loan system?

My frustration is how they could have prevented this from happening in the first place. The fundamental flaw in the system is having underwriting standards for no one, I can’t even emphasize how big of a mistake that is. It makes no sense, and it makes no sense for us as taxpayers who are on the hook for this.

If we’re spending hundreds of billions of dollars per year, those institutions should have to prove in an underwriting process that they’re good institutions that, more likely than not, will graduate people that will repay all of us as taxpayers.

Public policy shouldn’t underwrite against an individual and prevent someone from getting an education and progressing socio-economically, so the only other group to hold accountable is institutions to deliver certain minimal outcomes. That doesn’t mean there are no dropouts or defaults, but there should be cut off standards.

Did anyone know what was going on with these schools?

These schools were screwed up for quite some time and still receiving these loans.

The Department of Education has the tools to evaluate schools. It’s not that it happened overnight. The system is stacked in favor of the schools of for-profit entity. It should be stacked against them. It’s corporate welfare for these institutions with bad outcomes. Why are we doing it?

Imagine if you did this with automobiles and we decided everyone should get 30k to an automobile. The automakers and their stockholders would get rich, but it doesn’t make any sense. ”

What kind of measures could we use to ensure good practice?

I think a better way to think about is if there are minimal expectations we have regarding completion rates, employment rates, default rates. Imagine if you had a loan system that said, “The number of loans you can take out is dependent upon how you score on a variety of metrics: What your completion rate is, what your average income is, what your average placement rate is.”

You could gather data on this and we’ll put it into a formula to decide how much we distribute as the federal government to these schools.

Behavior would change, the economic incentive for any school – private, public, whatever – is tuition dollars.

Right now there is no distinction on that and it’s a flawed system. We ought to put expectations on outcome to the institution itself.

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