Student Loan Blog : Corinthian Colleges

‘Gap Loans’ at For-Profit Colleges Escape Proposed Legislation

Student Loan Girl — Tue, 27 Oct 2009 19:47:00 GMT

While acting last Thursday to approve the creation of a Consumer Financial Protection Agency, which will expand federal oversight of private student loans, a Congressional panel at the same time voted to reject a proposal that would have included school-sponsored “gap loans” under the authority of the new CFPA.

The House Financial Services Committee, in a vote of 39 to 29, approved the Consumer Financial Protection Agency Act of 2009 (H.R. 3126), a centerpiece of the Obama administration’s pursuit to overhaul the nation’s financial regulatory system. The approved legislation would create a new federal agency, the CFPA, which would have the authority to write new consumer protection rules in the arenas of lending and credit, including private student loans (“House Panel Moves to Regulate Private Student Loans,” Oct. 26, 2009).

Gap loans, however, could potentially be exempted from the CFPA’s oversight due to language included in the bill meant to shield small businesses and local merchants that extend credit to their customers. A proposed amendment to the CFPA Act that would have clarified that gap loans are subject to CFPA regulation was narrowly defeated in the House committee by a vote of 35 to 33.

Gap Financing on the Rise at For-Profit Schools

“Gap” student loans — so-called because they’re intended to cover students’ financing gaps, any college costs that aren’t covered by a student’s financial aid (scholarships, grants, federal student loans) — are increasingly being offered by for-profit colleges and vocational schools to boost enrollment as these institutions encounter a swelling influx of unemployed and low-income students looking to return to school to obtain a higher-earning degree, learn a new trade, or acquire additional training for their résumé.

“Because the economic meltdown has made it harder for students to get bank loans, several of these schools are increasingly stepping in, financing degrees in the same way a furniture store or used-car dealer might extend credit to customers,” explains Justin Pope, an education writer for The Associated Press (“For-Profit Colleges’ Increased Lending Prompts Concerns,” Aug. 15, 2009).

For-profit schools, also known as “proprietary” colleges, that provide gap financing, which include national heavyweights ITT Technical Institutes, Corinthian Colleges, and Career Education Corp., say that their financing programs allow students to attend school who wouldn’t otherwise be able to afford a college education.

But these gap financing programs are risky and expensive for students, consumer advocates maintain. Gap loans typically carry high interest rates, sometimes in the double digits, and large monthly payments that the schools’ generally low-income students often aren’t able to handle — all while allowing the schools to reap hundreds of thousands of dollars in federal money from the federal financial aid that students use to pay the bulk of their attendance costs.

“I believe we have an obligation to ensure that these schools are not allowed to continue to prey on students,” said Rep. Maxine Waters, D-Calif., who sponsored the defeated CFPA amendment. “By subjecting these schools to CFPA’s authority, the quality of the student loans these schools provide will improve” (“House Panel Approves Expanded Oversight of Private Student Loans,” The Chronicle of Higher Education, Oct. 22, 2009).

Consumer Groups Push for Regulation of Gap Financing

Consumer and student advocate groups, concerned about the potential for student loans made by proprietary schools to be exempted from the CFPA legislation under the bill’s small-business clause, had been lobbying in support of the Waters-sponsored amendment to explicitly bring gap loans under the authority of the CFPA.

“We just want to make sure that the risky financial products that some colleges, for-profits in particular, have been making to students are still covered by this agency, and not undercut by a well-intentioned suggestion of how to make sure that the neighborhood grocer isn’t unfairly and unduly impacted” by increased regulation, said Lauren Asher, president of The Institute for College Access & Success (“Regulating Private Student Loans,” Inside Higher Ed, Oct. 19, 2009).

Asher and TICAS joined a number of other consumer and student advocacy groups in drafting a letter earlier this month to Rep. Barney Frank, the Democratic chairman of the House Financial Services Committee, urging the committee to clarify that school-sponsored loans wouldn’t be shielded from the CFPA’s reach (letter to Rep. Barney Frank regarding H.R. 3126, Oct. 7, 2009).

“To effectively protect consumers, the CFPA must have full authority to regulate private student loans regardless of the institution offering them,” the groups wrote. “For consumers, a private student loan can pose the same serious risks whether issued by a financial institution or by a school. The CFPA should apply and enforce standards based upon the product and not the issuing institution.”

Gap Loans vs. Gap ‘Financing’: The Non–Student Loan

Proprietary colleges argued against the Waters amendment, saying that gap student loans are already regulated by the federal Truth in Lending Act.

New TILA rules, mandated under last year’s Higher Education Opportunity Act (H.R. 4137) and which will go into effect in February, will require student lenders to disclose more details about their private loan programs, including interest rates and estimated monthly payments, and to inform applicants for private student loans about federal student loan options.

Consumer advocates, however, hold that TILA regulations aren’t sufficient and that the stricter oversight of the CFPA is necessary in order to protect student loan borrowers.

In pushing for the Waters amendment, consumer and student advocacy groups pointed to the move being made by some schools to offer their gap funding under the auspices of “consumer financing” rather than as a student loan program. By structuring their gap funding programs as consumer financing rather than as private student loans, schools are able to skirt the student loan–specific requirements, regulations, and borrower disclosures mandated by the Higher Education Opportunity Act.

“It’s very alarming,” said Deanne Loonin, director of student loan borrower assistance project at the National Consumer Law Center. Schools “can structure the products in all kinds of ways — things like revolving credit lines, unsecured loans, even secured loans. It’s this new thing, and we’re worried about it.”

One for-profit school, Colorado-based Westwood College, is currently defending itself against a class-action lawsuit brought by students accusing the school of fraud in its student financing. The lawsuit charges Westwood with violating state banking laws. Westwood’s student financing program carries a relatively high interest rate of 18 percent, but the school doesn’t call its financing student loans.

The For-Profit Risk

Students at proprietary colleges are particularly vulnerable to the schools’ high-interest loans and financing programs, consumer and student groups say, because of who these students are: lower-income, higher-risk borrowers.

Low-income students, who tend to drop out of college in greater numbers than higher-income students, generally end up struggling to repay their student loans. And for-profit colleges, with their student populations that skew toward lower income levels, on average have lower graduation rates and higher loan default rates than other schools.

In 2007–08, students at proprietary colleges defaulted on their student loans at a rate of 11.1 percent, according to the Department of Education, compared to a default rate of 6.0 percent for students at public nonprofit colleges and universities and a rate of 3.8 percent for students at private nonprofit institutions.

Students at for-profit schools are also taking on increasingly higher debt loads: The percentage of proprietary college students borrowing at least $40,000 nearly tripled to 30 percent between 2003–04 and 2007–08, says Mark Kantrowitz, founder of the financial aid website, FinAid.org. The proportion of proprietary college students taking out private student loans has also come near to tripling, rising to 43 percent from 15 percent in that same time period, according to an analysis of federal data by the nonprofit group Education Sector.

Nonetheless, critics charge, as long as proprietary schools can continue to bring in significant federal funds with each student, the schools have little incentive to refine their lending practices to ensure that students aren’t taking on unmanageable debt.

“Consider, for example, a school charging $10,000, hoping to enroll a student who has lined up $9,000 in aid from the government and elsewhere,” writes Pope. “Even if the school loses half of the $1,000 it lends to get the student in the door, it comes out $9,000 ahead.”

And “for many of these students, if you don’t apply these thousand dollars, they’re not coming to school,” says Jeff Silber, an industry analyst with BMO Capital Markets.

From the school’s perspective, you’re realizing “all those other revenues,” he elaborates, “even if you write off $500 [of that $1,000] right away. … Financially it still makes sense to do this.”

And with last week’s defeat of the CFPA amendment, the stage is set for schools to press on with their gap financing programs, having sidestepped, at least for now, the impending shadow of the CFPA and increased federal oversight.

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Enrollment Up at For-Profit Colleges Despite Economy

Student Loan Girl — Tue, 16 Dec 2008 17:30:00 GMT

While numerous nonprofit colleges have halted construction and are undergoing hiring freezes and other cutbacks due to the declining economy, for-profit colleges are seeing higher enrollment numbers and higher profit margins (“Economic Downturn Is a Boon for For- Profit Colleges,” The Chronicle of Higher Education, Dec. 10, 2008).

Enrollments at nine major publicly traded college companies grew faster than average for the past three years, The Chronicle of Higher Education reports, and profit margins for the current year are projected to be the highest they’ve been since 2005.

Many of the negative trends impacting the economy — state budget cuts, widespread layoffs, and a projected unemployment rate of 10 percent — may mean for-profit institutions will see even greater growth as laid-off workers return to school to gain new job skills.

Influx of Students Presents Opportunities for For-Profits

By contrast, many public and private schools have been negatively affected by state budget cuts and are struggling to accommodate new students. The California State University system, for example, recently announced that it plans to cap enrollment for the fall 2009 semester, and could turn away as many as 10,000 new students because it doesn’t have the financial resources to handle them.

For-profit institutions, on the other hand, are well positioned to benefit from the influx of new students, suggests The Chronicle. Recent changes to federal financial aid policies have made federal grants and subsidized student loans more widely available to students at for-profit schools.

And some for-profit institutions are doing so well financially they have created their own loan programs that enable them to lend directly to their students. Students who need additional funds to cover their college costs, including those with poor credit, can apply for unsubsidized private loans directly at their school, a new practice that many schools, including Corinthian Colleges, have recently initiated.

Although for-profit schools welcome the influx of new students, college administrators are concerned that the economy will not recover quickly enough for their job-seeking graduates.

To ensure that students land the positions they need, career experts like Rene Champagne, chairman of the Career College Association, say its best to begin the search process as early as possible, preferably prior to graduation.

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Shares of Corinthian Colleges Stock Take Nosedive Over Student Loan Defaults

Student Loan Girl — Fri, 29 Aug 2008 01:56:00 GMT

Despite an 11.5-percent boost in student enrollment and an 18.3-percent growth in revenue over the last quarter, Corinthian Colleges saw its shares tumble in afternoon NASDAQ trading on Tuesday, as investor fears persist of rising defaults on the school network’s student loans (“Defaults Drown Corinthian,” Forbes, Aug. 26, 2008).

Corinthian’s stock value plummeted 19.3 percent, with investors selling off shares even as the company posted a smaller-than-expected fourth-quarter loss, thanks to higher revenues spurred by the increase in enrollment.

Second-Worst Stock Downslide Since Being Dropped by Main Student Loan Provider

Corinthian, a for-profit operator of more than 100 colleges and trade schools in the United States and Canada, has been struggling to maintain a source of financing for its 72,000 students ever since three of its largest student loan providers — Sallie Mae, College Loan Corp., and Student Loan Express — informed the company that, effective March 1, they would no longer be able to offer “serial” private student loans to the schools’ subprime borrowers. These serial transactions provided current subprime student borrowers — those who have weaker or limited credit histories — with subsequent student loans for ongoing studies.

In 2007, over 75 percent of Corinthian’s private student loan portfolio consisted of subprime student loans, and 90 percent of Corinthian’s private student loans in the United States were provided by Sallie Mae.

In fact, the 19-percent drop in Corinthian shares on Tuesday was the biggest percentage decline only since Sallie Mae made its announcement, on January 22, that it would stop issuing subprime private loans to Corinthian’s students. In the last 12 months, up until Tuesday, reports Bloomberg, Corinthian shares had risen 20 percent (“Corinthian Falls After Increases in Student Lending,” Aug. 26, 2008).

Taking Student Loans Into Its Own Hands: Inviting Risk With Revenue

To offset its loss of student loan lenders, Corinthian established a new company-sponsored student loan program in the fourth quarter called ACCESS and, according to Chief Executive Officer Jack Massimino, was able to provide funding for “the vast majority of students.”

But with a greater volume of student loans comes increased exposure to potential student loan defaults, and Corinthian’s defaults in the fourth quarter rose to 9.1 percent of its revenue, compared to 6.2 percent a year ago.

Corinthian’s chief financial officer, Kenneth Ord, said that for the 2009 fiscal year, Corinthian will spend all available cash on student loans that isn’t already earmarked for capital expenditures; however, investors are still uneasy, worried that Corinthian will fall short of its projected earnings for 2009 and may need to write off some of its student loans to stay afloat.

The company’s student loan program — and the higher rate of borrower defaults that investors fear is coming with it — “adds risk to the forecast,” said Jeffrey Silber, an analyst with BMO Capital Markets. “People were expecting sizable margin expansion, and this is going to put a damper on that. People are not giving [Corinthian] the benefit of the doubt.”

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Trade School Students No Longer Protected Under California Law

Student Loan Girl — Mon, 07 Jul 2008 23:50:00 GMT

California students at for-profit colleges now have fewer legal rights if their institution goes out of business. The state law that regulated for-profit colleges, which enroll some 400,000 students, expired at the end of June and lawmakers recently rejected a bill that would replace the law, according to a Chronicle of Higher Education article (“California's Oversight of For-Profit Colleges Lapses as State Law Expires,” July 1, 2008).

The rejected bill would have provided tuition refunds to California students at for-profit colleges through a state-run reimbursement fund and would have dropped the requirement that colleges place 70 percent of their graduates in jobs. The law would have also restricted students from suing their school over grievances.

Lawmakers, consumer advocates, and schools have battled for three years to negotiate terms of the new law without success. Advocates claim that some of these schools misrepresent the value and quality of their job-oriented educational programs, which causes students to incur large amounts of debt and leave many without viable options for employment.

Corinthian Colleges, one of the larger for-profit schools in California and a school that has been at the center of this controversy, recently settled a lawsuit requiring the school to pay $6.5 million for a charge that Corinthian exaggerated its job- placement record, according to an article in the Los Angeles Times (“Oversight of For-Profit Trade-Schools Expires in California,” July 1, 2008).

Robert Johnson commented that the for-profit college oversight bill that expired in June had so many requirements that he feared it would cripple smaller trade schools not part of a national chain like Corinthian. Johnson, the executive director of the California Association of Private Postsecondary Schools, said that the bill “was 112 pages of punishment.”

Lawmakers believe that the bill may reemerge later this year in a different form, although Governor Arnold Schwarzenegger may veto it, due to opposition from his Consumer Affairs Department. If the bill were to pass, it could go into effect as early as January 2009.

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Financial Industry Woes Affecting Commercial Education

Student Loan Girl — Mon, 10 Mar 2008 06:02:00 GMT

The current credit crisis, combined with recent legislation cutting federal subsidy payments to student loan companies that make federally guaranteed student loans, has begun to take a noticeable toll on commercial education companies.

The past few months have seen student loan companies pulling back on now-unprofitable federal student loans and tightening credit restrictions on their private student loans.

With investors fearful that the dwindling availability of student loan financing will lead to lower enrollment numbers, chains like ITT Educational Services, Corinthian Colleges, Inc., and Career Education Corporation have seen their shares fall between 30 and 55 percent since November, according to a New York Times article by Jonathan D. Glater (“As Lending Tightens, Education Could Suffer,” Feb. 19, 2008).

The Push and Pull of Commercial Colleges

These commercial schools, largely offering hands-on instruction in applied areas such as health care, computers, the culinary arts, and automotive repair, would typically expect to see growing enrollment during an economic slump like this one. Layoffs and a flagging job market tend to push individuals back to school, and plunging interest rates make student loans less costly for those needing to finance their education.

In the current economy, however, with lenders in every sector afraid of the kind of credit exposure that led to the subprime meltdown, consumer interest rates on everything from home loans to student loans have stayed steady, despite cuts to interest rates by the Federal Reserve totaling 1.5 points since December.

Commercial colleges typically charge higher tuition than public two-year institutions. Compounded by the fact that these schools have lower graduation rates and tend to be more likely to attract those who would be regarded as risky borrowing prospects — low-income students with poor or unestablished credit histories — potential students may not be able to get enough of the funds they need to attend one of these commercial college programs.

Since federal student loans carry borrowing limits, the higher tuition means that commercial education students must often look to private student loans to supplement their federal aid.

But with student loan companies tightening borrowing restrictions on their private student loans, and with several no longer offering federal student loans at all, these commercial ed students may find themselves increasingly unable to secure the financial aid they need.

Schools Seeking Ways to Adjust to Market Changes

As student loan companies withdraw from the federal student loan market and enforce stricter credit standards on their private student loans, the commercial college chains have begun exploring alternatives to help their students pay for classes, in order to keep their enrollment numbers from plummeting.

Corinthian, Career Education, and ITT have all announced efforts to find new lenders, make arrangements to preserve student loans, and expand their own lending programs.

These moves, writes Glater, point to “how dependent this sector of education is on student loans and how vulnerable the industry could become if credit woes continue to make it harder for lenders to raise capital.”

Lending Lockdown Could Begin to Affect More Students

Ultimately, the student loan crunch may reverberate beyond just commercial colleges.

“So far, problems have yet to be felt by most students,” Glater acknowledges. “But some in the lending industry have begun to warn that there may be fewer borrowing options, even for traditional students, in the fall.”

In the meantime, Michael Dannenberg, director for education policy at the New America Foundation in Washington, D.C., suggests that students who are already having trouble qualifying for the private financing they need for a commercial education consider less costly two-year community colleges that have open enrollment.

Or, as Glater offers, these students may look to enroll in one of the commercial schools that charges lower tuition, which could be covered entirely by federal financial aid.

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