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USA restores relief for in-debt students after closure of colleges

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Bryan Edwards

What're the odds? Statistically, and logically, there are some things that should not happen, especially when a series of conditions must be met. Think how hard it is to get a rollover of selecting the winner of six horse-races in a row, for example. How can it be, then, that there are so many in-debt young people who attended college but don't have their degrees or whatever? The answer lies in a series of mismanagement decisions over a period of years at all levels of government in the USA. And it could easily happen anywhere else, too.

Inevitably, the USA has a stupid name for the problem: they call it "the borrower defense (sic) rule." Ignoring the spelling mistake, the name gives no hint as to what it's for.

So here's the purpose without the silliness: students who have paid for courses at colleges that subsequently went out of business are liable for their student loans even though they will never get their qualifications or degrees.

Some 20 Attorneys-General have obtained an order in a Federal District Court that the Department of Education must implement a "Rule" that protects the students. The language is intemperate: they talk of "fraud" on a grand scale. But this is not at the root of the problem. The problem is a failure of both state and federal governments to put in place adequate measures to protect young people striving for a better future.

The scourge of substantial education fees and associated living expenses has led to millions of young people all over the world living under a massive debt burden for student loans. Some, encouraged by in some countries little or no moral hazard and short periods before release, choose bankruptcy. It's a logical and sensible move, provided that the loans were not guaranteed by their parents, as many are. But, at least most of those have been awarded their degrees or have earned a qualification.

The problem that the Attorneys-General were addressing was where fees were paid to commercial colleges which then went out of business.

So, how has this arisen?

First, there is the widely held belief, itself now at last being recognised as a fiction, that everyone should have at least some form of tertiary education. The demand for degrees in the USA is so great that there are now qualifications called degrees which would until recently have been termed "diploma" - in short, part of a degree or a "degree-lite." The official name for them is "associate degree." Being American, the US education system describes this as an "undergraduate degree" which gives it an even greater level of credibility than it should have. The thing about "associate degrees" is that they can be awarded by non-universities.

As education has become big business, the number of commercial concerns offering qualifications has grown dramatically. There are some quality controls but those applicable to tertiary education are, worldwide, much more slack than for up to, say, the end of sixth form or whatever the local equivalent is.

As business has moved in, government has failed to keep pace. One of the things that governments have failed to do is to provide that fees paid in advance are regarded as deposits and that colleges must keep those fees in what amounts to trust accounts until they fall due. If that was done, the next phase is to decide when fees fall due. Running a college is no different, in principle, to running any other business. Expenses are, more or less, the same every month. It follows, then, that fees taken in advance should be held in a segregated and protected account, with sub accounts for each student, and transferred into the operations accounts e.g. monthly. In principle, there is no difference between that and a solicitors' clients' account. In relation to the protected nature of the account, there is no difference between that and the advance payment for a sofa where the payment is held on trust until the sofa is delivered.

That's one side of the equation. The other is that lenders are all-too-anxious to pass large sums of money to young people in what might otherwise be enough to buy a house. But, when a house is mortgaged, there are all kinds of protections, aside from the obvious one of there being security. There is an income to prove reliability and prospects of repayment, there is often insurance (life, income protection, asset protection to name but three) and so the downsides for the lender are covered off nicely.

That is not so in education loans: if there is security, it is usually provided by the parents but in the USA today, there are far more people with little or no equity in their own homes than students seeking loans. While it is not fair to describe the lenders as predatory, they are often unwise in their decision making. Yet, especially in small communities, if they don't hand out student loans, they are seen as bad citizens.

The government could reduce the problem by making colleges more selective and increasing vocational colleges for those not academically inclined. It could also cap both tuition costs and on-campus housing and food costs. Also, in the internet age, materials and books can be legitimately shared and the costs of those dramatically reduced. All of these measures would reduce the amount that students need to borrow.

Any questions of fraud are a separate matter. What the Attorneys-General have obtained is an Order that those who have paid fees for courses not provided are entitled to avoid stringent enforcement by their lenders. That, of course, put the burden on financial institutions and, mostly, that's not fair. But equally, it's not fair that the students should be deprived of their future income in order to repay a debt for something they did not have to say nothing of the fact that they have lost part of their lives in attending a college that won't provide the expected qualifications or degree.

The scandal started in 2014 when the U S Department of Education closed Corinthian Colleges, a business operating under four names at almost 100 locations. At the time, it had more than 70,000 students enrolled in a variety of courses. The story of that debacle, which arose out of a failure to produce records necessary to continue to receive federal money, is at https://www.npr.org/sections/e....

And, as that story shows, there's another almost demonic aspect to the story: colleges as money lenders, setting fees and lending them to students who were unable to obtain commercial loans. See https://www.consumerfinance.go... and https://www.consumerfinance.go... . ITT said at the time that it would defend the action. The CFPB website is silent as to the result of the action. In September 2016, after federal aid was cancelled, ITT Educational Services went into liquidation, closing 136 technical schools and leaving more than 35,000 students without their qualifications.

However, a statement on the ITT Technical Institute website (http://itt-tech.info/) said "For students who did not graduate, ITT Technical Institute has agreements with several partner schools that will provide an opportunity for you to complete your program of study." The courses were not degrees and so the term "graduate" is misleading.

The lessons, however, come down to the basics of consumer financing. The debt overhang is as a result of what might be termed "hopeful" lending, the recovery is going to be a long, slow slog if it happens at all and write-offs are likely to be substantial, although socially advantageous. But for financial institutions, there is a way they can help: the fees could be held by the bank under slow-release, like stage payments in construction, with the final payment only after the final examination. Schools and colleges that don't have three months' operating costs in hand should not be funded by moneys from borrowing made by the students.