INSIDE HIGHER ED: Private Loan Takedown

Career College Central Summary:

As scrutiny of for-profit institutions increases, direct private loans from those institutions to students are becoming rarer. One reason is that states have joined federal agencies in scrutinizing the sector over its lending, recruitment and advertising practices.
Take the Minnesota attorney general's attempt to crack down on Globe University. Attorney General Lori Swanson charged the university with violating state law and making unlicensed loans with interest rates as high as 18 percent.
Globe offered a private loan directly to students, calling it the Educational Opportunities and Student Access loan. The state received complaints about the program and amended an ongoing lawsuit to add allegations of unlicensed lending and usury charges.
“Most public companies used to do this. Corinthian [College] had a few iterations… another was I.T.T. Education [Services]. Those were the most aggressive in loaning money,” said Jeff Silber, a college-sector analyst with B.M.O. Capital Markets Group.
Corinthian’s Genesis loan drew the ire of the Consumer Financial Protection Bureau (C.F.P.B.), which filed a lawsuit last year over the company's allegedly predatory private loans. The C.F.P.B. has led the way in aggressively pursuing for-profits about possible predatory lending.
The for-profit industry's private loan programs are often connected to the U.S. Department of Education's so-called 90/10 threshold, which caps operating revenue at 90 percent from federal sources. Companies had to find the other 10 percent of revenue elsewhere, so some turned to students, who often don't have the extra dollars, Silber said.
The C.F.P.B. sued Corinthian for raising tuition prices so students would max out their federal loans and grants and have to make up the balance through private loans. The agency charged I.T.T. similarly, due to the institute's Temporary Credit loan, which had to be paid in full by the end of a student's academic year. However, in the lawsuit against that company last year, the C.F.P.B. stated I.T.T. was aware students would not be able to pay back the funds filling the tuition gap. Corinthian denied the allegations. I.T.T. called the complaint "unfounded" and stated that the loans were made by a third party.
Direct, private loans from for-profit institutions to students can be risky for colleges, Silber said, adding that institutions don’t want to put their own balance sheets at risk and, as a result, some view it as a segment of the industry that is best left to banks. These days very few public companies offer private loans and if they do they're limited, he said.
The demographics of students at for-profits also make them inherently risky borrowers, Silber said.
“Generally these types of students have a tough time getting financing,” he said.

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