Home > Uncategorized > For-Profit School Failures Reminiscent of Bank Failures… and the Problem in Both Cases Is Too LITTLE Regulation

For-Profit School Failures Reminiscent of Bank Failures… and the Problem in Both Cases Is Too LITTLE Regulation

February 12, 2017

An article by Elizabeth Olson in the Dealbook section of the NYTimes on Wednesday of this past week reinforced the notion that the profiteers who operate for-profit schools are heading for a crash similar to the one experienced by those who sold toxic mortgages. And like that crash, the taxpayers will likely bail out those who made loans to these questionably accredited schools in the same way we balled out the banks who made loans to questionably song mortgage products.

In this replay of the 2008 mortgage crash, the banks issuing loans effectively colluded with the for-profit schools who lured marginally prepared students to enroll in programs that would earn a degree that would land them a high paying job. This is analogous to the same way shady mortgage officers lured prospective homeowners to take out loans for houses they could not afford, loans that the new homeowners could never realistically pay back. In the mortgage crash, auditing firms like Moody’s overlooked obviously toxic mortgage products, assigning them artificially high ratings that misled investors.  In the case of for-profit schools, the American Bar Association, the organization charged with accrediting the for-profit schools, played the role under-assertive regulators. In both cases the group that suffered most was the individuals striving to fulfill a dream: the home-owner who never should have been issued a mortgage and the prospective student who was uninformed about the poor quality of the school they selected and, in some cases, was unqualified to enroll in the program at all. In both cases the group that suffered least was the money lenders and the profiteers who misrepresented their product.

In the case described in Ms. Olson’s story, the Charlotte Law School was the for-profit school offering a program that promised to land the graduates a high-paying job in the law field. The Education Department issued the loans, which helped underwrite that Department’s operations in lieu of a tax hike. And the American Bar Association (A.B.A) and the Education Department itself under-regulated the “marketplace”. The whole house of cards started to collapse when the Obama administration decided to crack down on for-profit schools with unacceptably low graduation and job placement rates… and whose students were not paying back their loans. Here’s what happened then:

The Obama administration cracked down on for-profit schools whose students did not graduate or failed to pay off loans after earning degrees that had little value in the job market. Charlotte Law found itself among them, the first law school to have its federal student aid severed.

Its problems have placed greater scrutiny on the A.B.A. and its accrediting arm in their role as watchdog for legal education.

“The system we have now was designed for times when schools were flush with students and cash, and accreditors just had to make sure those were used well,” said Rick Bales, a professor at Ohio Northern University’s law school, and its former dean. “It was not designed for crises, and there is more than one law school now facing problems.”

Critics of Charlotte Law say it has enticed unqualified students. Many graduates, they say, have racked up considerable debt but failed to find higher-paying legal jobs. According to A.B.A. data, only 26.3 percent of recent Charlotte Law graduates had full-time jobs that required passage of the state bar and another 10 percent were in jobs where a law degree was preferred.

As federal law school debt mounts, discontent with the accrediting process has been building. Last summer, Education Department officials asked bar accreditors why so few graduates of low-performing schools had found bar-required employment. According to a transcript, when asked how many law schools had lost their accreditation for low bar passage rates, the A.B.A.’s answer was none.

A recent review of the 205 accredited law schools, by the nonprofit Law School Transparency, found that 51, including Charlotte Law, were in the “extreme risk” or “very high risk” category for graduate success.

The obvious solution here is to tighten up the regulations so that schools who “entice unqualified students” are put out of business and fewer uncollectible loans are issued. But the chances of that happening in an administration that is seeking to repeal Dodd-Frank and seeking to de-regulate for profit schools are virtually non-existent.

As you can tell from the chain of events above and the chain of events that led to the crash of 2008, connecting the dots is difficult… indeed I may have missed some of the details in the sequence. But one thing IS clear: the lack of regulations contributed mightily to both the mortgage collapse and the pending student loan collapse and in both cases the middle class taxpayers are covering the costs and the bankers and loan officers are unharmed. THAT point needs to be emphasized if there is any hope of reform… But with Betsy DeVos about to take over the Department of Education I expect to see more toxic loans and more fly-by-night profiteering schools emerging.

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