Demand Affordability for Student Loans

Phoenix-City-2487New Orleans Congress is debating real limits on the amount of student aid that they will cover on for-profit colleges, since finally they have the memo that too many for-profits are fleecing the students and they are paying the bill both on the front end with $20 billion in student loans and on the back end with higher defaults from working stiffs who don’t make enough in the new job to pay for the student loans.  The issue here should be simple, just as it was with home loans:  the test has to be affordability!  When the debt to income ratio is wrong, just as in the housing market, any fool can handicap the chances of default.

The Department of Education has held up new rules for for-profit schools until they calm down the lobbying whiners, but their guideline on affordability hardly seems extreme.  They want to make sure that a student loan from such an institution can be paid off within 10 years with no more than 8% of the former student’s income.  That’s a stiff bite and anything but a free ride, but it’s still a huge amount of money, especially if the there was no truth to the advertising from the schools that there would be newer and better paying jobs once school was finished.

The Times quoted Senator Tom Harkin (D-Ia) singing the right song:  “I am pleased to see the Department of Education releasing proposed regulations around for-profit higher education,” he said on Tuesday. “For-profit colleges must work for students and taxpayers, not just shareholders.”   Totally, radical!!!  Students and taxpayers, not shareholders!!! I can hear the chant in front of a lot of college-in-a-box outfits that are not delivering.

New regulations that are coming out soon seem to be designed to curtail some of the more unscrupulous recruiting practices used to dupe workers into a fake-education trap that ends up strapping them with debt rather than better chances to succeed.

Affordability criteria, only “selling” to students who are eligible, tightening debt-to-income ratios, not allowing payments for recruiters “by the head,” are all lessons we also learned in the housing subprime meltdown.  Interesting to me that we are moving more aggressively to ban these practices from for-profit education than we are in housing, but lessons learned should be applied somewhere at least.

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