A college degree is the primary mechanism for upward social mobility, or so suggests conventional wisdom. For thousands of American college students, however, that wisdom is challenged. According to the Labor Department, the cost of a 4-year college degree has risen 1120% over the past 35 years. To pay for education, more students are turning to federal financial aid and taking out loans than ever before. According to The College Board, the organization responsible for the Scholastic Aptitude Test (SAT), one of the more recognized college entrance exams, student loan debt quadrupled in the 15 years between 1992 and 2007, leaving an increasing number of graduates straddled with debt.
As tuition rises and incomes shrink, students are forced to make difficult life decisions. Tom Harken, D-Iowa, and chairman of the Senate Committee for Health, Education, Labor, and Pensions, said in an email to Bloomberg that as higher education becomes less affordable, the American dream is being postponed or outpacing the ability of millions of young people to achieve it. The path of higher education used to afford an educated individual a degree, the security of a job, the means to begin a family and purchase a home, resources to invest in retirement, and discretionary income to reinvest in the economy. Now instead, for an increasing number of American college and university students, that path to higher education looks like the accumulation of debt, uncertain degree completion, difficulty finding gainful employment, cohabitation with parents, postponement of family creation, non-qualification for mortgages, and lack of discretionary income that helps drive the economy. Students leaving school with debt are slower to make decisions to start families and purchase big-ticket items like homes and cars, purchases which contribute to economic growth.
With the rise of online education programs has come an increase in the number of privately owned and publicly traded institutions of higher education offering degrees for course completion. Names like The University of Phoenix, ITT, and Kaplan are among the more universally recognized organizations offering for-profit higher education. For-profit colleges and universities appeal to students because their selection process is less rigorous than state and private colleges and their programs generally include scheduling and geographic flexibility. In the best of situations, for-profit learning institutions provide flexible schedules and tactical job skills, making them ideal options for working professionals who are hoping to develop their marketability.
It is these for-profit institutions of higher education and specifically the preponderance of student loan default that originates from their attendees, however, that keep policymakers, lawmakers, higher education and economic leaders around the nation awake at night. A number of factors contribute to the higher rate of default on federal students loans from students at for-profit universities. First, the cost of for-profit programs outpace tuition at state and some private schools so that loan amounts are higher. Nationally, for example, the cost of a 2-year associates degree from a for-profit program outpaces the same degree at a community college by a multiplier of 4.2. Second, statistics also suggest that students who sign up for for-profit programs are less likely to complete their courses of study. The National Center for Educational Statistics (NCES) shows that the open enrollment policy of for-profit institutions is no friend to students, the majority of whom do not finish their courses. On the other hand, students who enter higher education programs whose acceptance rates are competitive are far more likely to complete their studies.
In addition to the higher costs and attrition endemic to for-profit schools, students who attend for-profit program are more dependent upon financial federal aid than are students who attend community colleges and private or state universities. In 2014, 91% of students attending for-profit institutions receive federal financial aid in the form of grants and student loans.
Students receiving grants are not required to repay them. Grants are only awarded, however, to undergraduate students. Undergraduate students who do not quality for grants and students seeking graduate study or professional certificates are required to take out federal or private loans if they require assistance for school. Students are required to repay funds borrowed whether or not they complete their courses of instruction. With high attrition rates, the majority of students at for-profit schools have not completed degrees that would increase their marketability and lead to higher salary positions. Students without skills to secure these higher paying jobs find it difficult to repay their student loans.
With costs being higher, drop out rates being significantly higher, and the practicality of being able to repay large debt without a completed degree, default rates for students attending for-profit institutions are, perhaps, not surprising. Policymakers and lawmakers are considering modifications to federal financial aid programs to ensure that students who need assistance to attend institutes of higher education will be able to qualify. Among options that are being considered is the Obama administration’s “gainful employment” rule which would require for-profit colleges to demonstrate that programs offered will prepare students for professions that will provide enough income to cover the cost of loan repayment. Another method already in place requires that colleges keep their student attrition rates below a threshold, assuring that the majority of students entering a program are able to complete it.