Wednesday, September 7, 2016

Another For-Profit College Runs Dry

ITT, considered one of the most stodgy and reliable of for-profit colleges, closed yesterday. The company apparently just ran out of money. If ITT generally lived up to the modest promises it made in the educational programs themselves, the same might not have been true in other parts of the company, with investigations ongoing related to the company’s marketing, lending, and securities disclosures. Most students at ITT will have to start their training all over again at a regular college, but those who took out loans will also have to spend the next few years working through the details of what happens to those debts. The case illustrates how much risk students take on when they attend for-profit schools, especially when seeking a four-year degree, which in practice may take five to eight years to complete. Students start out expecting the kind of institutional stability that a for-profit college may not be able to provide. In practical terms, the only way to reduce the risk of attending for-profit colleges to a responsible level would be to have lending terms that provide automatic loan forgiveness in the event that the college fails. Lenders would object, of course, but such an arrangement may not be as far-fetched as it sounds. As it is, anyone who invested in loans to ITT students will lose most of their capital, as there are few avenues to collect quickly on those debts. Even before ITT closed, the default rate on its student loans was alarmingly high. Requiring debt forgiveness when a college fails would not increase the risks to lenders by very much. The abrupt closure of ITT will make students a little more wary of all for-profit colleges. If ITT, which had been open for 50 years, was secretly on the edge of collapse, then how are the newer and smaller competitors doing? Smaller enrollment, in turn, could hasten the closure of most of the remaining for-profit colleges.