The Career College Association continues to breathlessly proclaim that the decision by some major lenders to stop providing subprime private loans to students attending for-profit trade schools of dubious quality is leading to a major college access crisis.
"In career colleges across the country, college plans are coming unraveled," Harris Miller, the association's president wrote in a recent column in the newspaper Politico. "The academic equivalent of foreclose signs are going up across the land."
Sounds scary. But if you listen to what the leaders of some of the largest chains of for-profit higher education companies are telling investors, you get an entirely different story.
For months, some trade school chains, such as Capella University, Devry Inc., Strayer College, and the University of Phoenix, have been going out of their way to assure Wall Street that the credit crunch has had little to no effect on students attending their institutions. "We are really not seeing any impact on our business," Stephen Shank, Capella's chief executive officer, told The New York Times in February.
But even those companies that are feeling the pinch -- because they have been aggressively steering financially-needy students to take out high-interest private loans -- are telling investors that they are not panicked. In fact, some are even acknowledging that the credit crunch is forcing them to act more responsibly.
Take Career Education Corporation, for example. During a recent earnings call with financial analysts, Gary McCullough, the company's relatively new president, said, "We continue to believe that our company can emerge from this period stronger and better positioned for the future."
How does the company plan to become stronger? First, McCullough said, by becoming more discerning about the students they enroll -- making sure, for example, that they have the desire "to be successful in their academic pursuits." And second, by taking steps to ensure that students fully understand their repayment obligations. For the first time, the company is requiring private loan borrowers to seek out co-borrowers [In the past, the company has encouraged lenders to waive that requirement apparently to speed up the enrollment process].
Why the changes? Because now Career Ed has more of its own skin in the game.
In January, Sallie Mae announced that it was terminating a long-term deal it had with Career Ed to provide high-cost private student loans with interest rates and fees of more than 20 percent to low income and working class students who normally wouldn't qualify for them because of their subprime credit scores. Sallie Mae officials said the student loan giant was abandoning the recourse loan arrangement -- and others it had forged with similarly questionable for-profit trade schools -- because the lender had been taking huge losses on those loans. In fact, nearly half of students at Career Ed who borrowed these loans are expected to default on them. And there have been serious allegations that recruiters at the school chain had duped disadvantaged students into taking on subprime private loans without adequately explaining to these students what their repayment obligations would be.
To make up for the loss of Sallie Mae, Career Ed announced that it will make private loans to subprime borrowers itself. The company can do this, McCullough stated, because "we have a strong balance sheet." But now that the company will be entirely on the hook for these loans, it will be more careful about who it lends to. "These students will be at higher FICO bands than those who traditionally have received loans through the recourse program," he said.
So by tightening its lending standards is Career Ed contributing to an impending access crisis? That's not how McCullough sees it. "It's in everyone's best interest," he said, "that we focus on students that have both the desire, the financial capability, and who are prepared to be successful with their academic pursuits."
In other words, it doesn't make sense to push high-cost private loans on the most disadvantaged students who are at an extreme risk of dropping out and of being unable to repay their loans. The highest risk students would be much better off starting out at lower cost schools, like community colleges, that wouldn't require them to take out private loans to attend.
To read more, please visit www.HigherEdWatch.org