Student aid -- such a seemingly innocuous idea. Young Americans wishing to improve their minds and earning potential ask Uncle Sam for a loan to cover university tuition. The student gains entrance to a university, earns a degree, and commands a higher salary. Uncle Sam comes out a winner twice over, because not only will he earn a nice annuity over the next twenty or so years in the form of a repayment of principle plus interest, he will also rake in revenue in the form of the higher income tax the now high-earning college graduate will have to cough up every April.
Such an elegantly beneficial system couldn't possibly have a seamy side, could it? Well, it appears that it does, if CNBC Senior Stocks Commentator Herb Greenberg is to be believed. In a December 20, 2010 piece for CNBC's ongoing series, "The College Debt Crisis," Greenberg exposes "one of the dirty little secrets of the education industry": the manipulation of default-rate figures on student-loan borrowers.
This manipulation goes on industry-wide, but is "far more prevalent among beleaguered for-profit schools than not-for-profits," Greenberg reports.
Motivating this manipulation are federal student-aid regulations, which mandate that "schools ... keep their so-called 'cohort' default rates below a certain level," Greenberg continues.
The cohort default rate measures students who default within one to two years of entering repayment. A loan isn’t considered in default until 270 days after a payment has been missed. For years now, according to the Higher Education Act, school [sic] are at risk for losing federal aid if defaults exceed has been [sic] 25 percent for over two years; that’s in the process of shifting to 30 percent over three years.
Perilously poised on the threshold of such a shift, many institutions, for-profit or otherwise, have resorted to the time-honored practice of "cooking the books," lest their true figures on the number of student loan defaults among their graduates get them pegged as a "diploma mill," a designation that can tarnish any school's brand.
This figure-massaging carries the name "default management" in the higher-ed biz, and it typically requires outsourcing specialists. "To make sure they don’t exceed those limits, the schools contract with companies that specialize in 'default management,' which is encouraged by the Education Department as a way to help students," Greenberg writes.
Though default management specialists supposedly serve the purpose of helping students manage their loans, Greenberg reports that "[t]o many schools ... it appears 'default management' is really a euphemism for making sure default rates don’t exceed those statutory limits in the first two (and now three) years after a student gets a loan."
In order to reach that statutory limit, default management specialists use basically three tricks. These are:
The number and type of strategies at the default management specialists' disposal aside, the fact that such specialists exist at all is troubling. An educated populace adds enduring, reliable value to an economy. Human capital is a nation's greatest single asset -- provided, of course, that it avoids becoming mired in debt. The sort of short-term, quick-return mentality that has led to the financialization of the U.S. economy has come to infect higher learning, as citizens are marched down the new road to serfdom clutching no longer house title deeds but college diplomas.