U.S. News and World Report published an article yesterday which highlighted a new report that outlines the characteristics of student loan borrowers with excessive debt. The report was published by Mark Kantrowitz, publisher of Finaid.org and Fastweb.com. Overall, the article and report highlighted the higher debt burdens carried by students attending for-profit colleges and universities. Here is a quote from the article:
“Seniors at for-profit colleges are more than twice as likely to have accumulated dangerous amounts of education loans as seniors at other kinds of four-year colleges, according to a new report.“
The report entitled “Characteristics of Borrowers with Excessive Debt” analyzes the data from the National Postsecondary Student Aid Study(NPSAS). The NPSAS is a survey conducted every four years by the National Center for Education Statistics at the US Department of Education. Overall the Dept. of Ed’s study provides detailed information on how students paid for their higher education. In his report, Mr. Kantrowitz attempts to identify the criteria that are likely to lead to a student graduating with excessive debt. Mr. Kantrowitz and Finaid.org define excessive debt for graduates as $40,000 for anyone attending a 4-year college or university and $30,000 for a student attending a 2-year college or university. Overall, Mr. Kantrowitz estimates that the percentage of borrowers with excessive debt increased from 4.1% in 2003-2004 to 7.9% in 2007-2008. The report also includes an analysis of student characteristics that led to a probability of excessive debt greater than the overall average. Attending a for-profit school is one of the criteria. The probability of excessive debt for students attending a for-profit college increased from 11.3% in 2003-2004 to 29.7% in 2007-2008. We attribute this to the tuition pricing policies of most for-profit postsecondary education operators. The table below outlines the characteristics that Mr. Kantrowitz’s has identified as likely to lead to a higher probability of student borrowers with excessive debt.
A Quick Word About Mark Kantrowitz
Mark Kantrowitz is the publisher of Finaid.org and Fastweb.com. Finaid.org is website designed to be a comprehensive source of student financial aid information. According to Compete.com, finaid.org had approximately 500,000 unique visitors in April. Fastweb.com is a leading online college resource for students, with a particular focus on scholarship information. In April, the site had more than 2.0 million unique visitors.
ESI’s Program Offerings Are Expensive and Students Graduate With Substantial Debt Burdens
As we highlighted in our original post on ITT Educational Services, Inc., tuition pricing policies for many for-profit postsecondary education providers are increasingly unsustainable. In many cases, particularly for those students attending an ITT Technical Institute, the return on educational investment has now become questionable, if not altogether negative. As we stated in our original write-up on ESI, it appears the company has broken “the more you learn, the more you earn” student covenant. It costs more than $40,000 in tuition to complete the average associate’s degree program offered by ESI. The vast majority of students finance their education through a combination of pell grants, federal financial aid, private student loans, funding from ESI directly, and other sources. While ESI does not disclose average student debt burden, we are fairly confident that most students who complete an associate’s degree program have $35,000 in debt, if not more, upon graduation. Keep in mind that Finaid.org defines excessive debt for a 2-year program as anything exceeding $30,000.
High student debt levels are strongly correlated to high levels of cohort default rates. Universally, investors now expect cohort default rates to increase over the next several years, but it also appears many will dismiss this trend as a function of a depressed economic environment. We think this is a mistake. Cohort default rates for higher priced associate’s and bachelor’s degree programs are in a secular uptrend, which will be augmented by the current economic environment. Tuition is simply too expensive. Many for-profit providers of postsecondary education have consistently used the traditional academic sector as their benchmark for tuition pricing. We think this policy needs to change or cohort default rates will remain at elevated levels for years to come and regulatory scrutiny will likely increase.
Is the U.S. News and World Reportarticle the first of what might be many articles that will attempt to demonize or vilify the for-profit postsecondary education sector? We’re not sure. The for-profit providers of education are a crucial part of the overall higher education sector and their contributions to students who would otherwise not obtain a degree should not be overlooked. However, we think we have reached a major inflection point on tuition and affordability. We are confident that if companies such as ESI do not address their tuition pricing policies the likelihood of future regulatory scrutiny due to high cohort default rates will increase. We estimate that restoring the affordability of ESI’s programs could negatively impact annual EPS by $2.50-$3.00, maybe more.
As always, please act accordingly….
