This morning NPR reported on a Senate report claiming for-profit colleges exploit students. Yes, graduation rates for many for-profit colleges are very low and it’s unfortunate. Incurring debt without the higher earnings a degree usually offers to help repay it hinders wealth building.
But how are for-profit colleges to blame for students borrowing money to go to school and then not graduating? Government interference in the student lending market actually created this problem. Here’s how.
Without government intrusion, students and banks weigh costs and benefits in lending and taking out loans before any loans are made. Banks decide whether to lend to students, and at what rate, based on likelihood of repayment in order to ensure their own continued solvency. So any loans taken out are likely to be profitable for both parties.
In general, borrowers are not particularly good at seeing into the future to know whether they’ll be able to repay a loan. That’s why private, competitive lending institutions hire people and use algorithms to help determine whether a loan should take place, taking into account a borrower’s history and what their investment plans are to come up with a loan amount, term and interest rate that is likely to be profitable for both the lender and the borrower. For-profit, competitive lending institutions do this because they will fail if most of their borrowers default their loans.
So let’s say a borrower with a terrible academic record or a plan to study underwater basketweaving for $40k/year came into a bank to take out a student loan. A competitive lending institution would say either, “No way, come back with a better plan,” or, “Sure, but here’s your crazy-high interest rate,” and they’d have 10 surer bets to offset the risk of default.
In contrast, federal government student loan programs lend with little regard to profitable interest rates and likelihood of repayment because they do not need to make a profit to continue to operate. The result is that students take out loans they could never hope to repay.
Sometimes they spend their student loan money at for-profit colleges. Even more of the time they spend it at state schools. It doesn’t actually matter where students are dropping out of school.
Where students spend the money they never should have borrowed doesn’t really matter, NPR. To fix the problem, Senators need to stop investigating for-profit colleges and take a good long look at themselves. And media outlets like NPR must stop taking government reports at face value and instead actually investigate the root causes of supposed exploitation.
Photo by 401(K) 2012