Student Loan Defaults: Follow The Money?

American postsecondary education -- both for-profit and not-for-profit, and at public and private institutions -- must be focused on increasing completion and providing affordable excellence for all of our students.
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It was Ralph Waldo Emerson who said in 1847 that "[c]onsistency is the hobgoblin of little minds." While the phrase might be a cliché these days, in today's highly partisan, gridlocked Washington, DC, consistency characterizes both political parties: heels deeply dug in; minds apparently quite small.

Democrats favor abortion; Republicans oppose abortion. Democrats want tax increases; Republicans want tax decreases. Democrats want to confirm a ninth Supreme Court Justice now; Republicans want to wait until after November. And on, and on, and on... Rarely do the two major political parties change their views, not to mention reverse course and swap positions.

But there is an interesting exception to this policy rigidity, and it has largely gone unnoticed by the media and by the political-science profession. Indeed, the professoriate stands to benefit from examining and explaining the origins of this policy reversal. There are future doctoral dissertations waiting to be written about how and why Democrats and Republicans reversed positions on the merits of the for-profit trade-school sector.

Here are some facts.

Approximately 30 years ago, U.S. Department of Education Secretary William J. Bennett launched a crackdown on the growing number of student loan defaults at America's postsecondary-education institutions -- both for-profit and not-for-profit. Default rates were reaching an alarming rate and were costing the government (and taxpayers) tens of millions of dollars annually. Assuming that lending banks and loan servicers followed certain "due diligence" rules in trying to collect delinquent student-loan payments, the federal government would guarantee these loans for the issuing banks (or for those institutions holding secondary-market paper) should a default occur.

Major network television programs like CBS's 60 Minutes and ABC's 20/20 ran exposes about how some for-profit trade schools recruited students from welfare lines. These students were promised the world about what a degree from some of these schools would mean for their future.

In many documented cases, students were misled into believing that they were signing up for grants when, in fact, they were assuming loans -- loans that had to be repaid, much to their surprise. Several proprietary schools simply took the money and ran: they failed to provide the promised education. Too many students then found themselves without an education, deeply in debt, and, shortly thereafter, in default on their student loans. As most people know today, student loan debts are not dischargeable in bankruptcy.

I worked for Secretary Bennett and remember listening to Bennett testifying on student-loan defaults before the late Senator Edward M. Kennedy (D-MA), then the chair of the Senate Education and Labor Committee. Kennedy asked Bennett whether he thought that a high student-loan default rate at an educational institution was a proxy for a lousy education at that school. Bennett shot back that this was precisely his point: if a school had a default rate of 90 percent or more -- and some schools even had 100 percent default rates -- it was pretty obvious that there were major problems with the quality of that school's education.

Kennedy and then-Senator Tom Harkin (D-IA) disagreed with Bennett. They contended that there were undoubtedly many reasons why students defaulted and that the federal government could not hold schools accountable for what their students did -- or did not do -- once they graduated.

Bennett nonetheless persisted, and the Education Department promulgated regulations that, in a relatively short time, began to reduce the number of student-loan defaults. Several trade schools went out of business or were shut down. I was deeply involved in this effort and repeatedly made it clear in testimony and other public statements that the Reagan administration was not against proprietary, for-profit schools. There were then -- and are now -- plenty of excellent for-profit institutions. The goal was to eliminate the bad actors -- the high-default-rate institutions -- whether they were for-profit or not-for-profit. To its credit, the Clinton administration essentially continued the policy that Bennett had initiated.

But at some point during the last 20-plus years, the parties switched positions on this issue. Today, as default rates have started to rise once again, it is Republicans who often side with the for-profit sector and Democrats who want to reduce defaults by clamping down on the rapid growth of that sector.

Moreover, in the eyes of some, the Obama administration has been waging a relentless war against the for-profit sector, first, by promulgating an "ability to benefit" regulation that made it harder for trade schools to enroll students who could not demonstrate an ability to benefit from their training. More recently, the Obama Education Department has threatened action against the Accrediting Council for Independent Colleges and Schools ("ACICS"). ACICS was the accrediting body that gave consistent thumbs up to the large for-profit Corinthian Colleges chain of schools that collapsed in 2015. Former Corinthian College students were left without degrees, without an education, and had unpaid loans that the Obama administration (with good cause) wants to forgive, even though the U.S. taxpayers would be on the hook for what could be hundreds of millions of dollars.

With some $1.3 trillion in outstanding student-loan debt today, a high default rate means big money, as evidenced by the Corinthian collapse. It looks like we got into this situation, in part, because accrediting bodies looked the other way -- much like the lax oversight by those financial accrediting bodies that gave AAA ratings to securities and other esoteric investment instruments in 2008 based on subprime mortgages that should never have been issued.

Another explanation is that the responsible Congressional committees may have looked the other way and failed in their oversight responsibilities. They could easily have continued what was once a bipartisan crackdown on defaults and poor-quality educational offerings at all educational institutions.

Since 2004, student-loan debt has quadrupled and defaults have doubled. Clearly there is big money associated with this part of our education enterprise: big money for the schools and, I suspect, big money in campaign contributions to members of Congress.

American postsecondary education -- both for-profit and not-for-profit, and at public and private institutions -- must be focused on increasing completion and providing affordable excellence for all of our students. It is important to examine how we got into this situation by looking at the accreditors, the schools, and the Members of Congress who might have been spending too much time chasing campaign dollars and not enough time demanding affordable excellence. Follow the money, as we learned from Watergate.

Charles Kolb served as Deputy Assistant to the President for Domestic Policy from 1990-1992 in the George H.W. Bush White House. He was president of the French-American Foundation -- United States from 2012-2014 and president of the Committee for Economic Development from 1997-2012.

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