Subprime Education: For-Profit Colleges and the Problem with Title IV Federal Student Aid
McGuire, Matthew A., Duke Law Journal
Federal student-aid policy is designed with the goal of expanding access to higher education for all students. It has been enormously successful in achieving that goal. Yet, for many students, federal student aid has served only to burden them with oppressive student-debt obligations. These obligations are a particular problem with respect to the for-profit higher-education sector, which receives a large and ever-growing proportion of federal aid. This Note examines the interaction between federal student-aid policy and for-profit institutions, arguing that the noble goals of modern federal student-aid policy enable the very practices that lead to negative outcomes for many students by creating a lucrative market for "subprime education." This Note analyzes a continuum of approaches to reducing the negative student outcomes caused by many for-profit institutions, concluding that the blame lies not with for-profit institutions but with federal student-aid policy. Ultimately, the modern federal student-aid regime requires regulators to choose between abetting negative student outcomes and reducing access to higher education. This dilemma can be avoided only by deemphasizing the student-oriented aid model in favor of an institution-centered model that is focused on reducing the price of education.
Title IV of the Higher Education Act of 1965 (HEA) (1) established the foundation for federal student aid in higher education. (2) The HEA rests upon the basic premise that every student, regardless of personal wealth, should have the opportunity to pursue career training or a degree. (3) "[T]his Nation could never rest while the door to knowledge remained closed to any American," President Johnson said after signing the bill. (4)
Today, the United States continues to make a substantial financial commitment to keeping the "door to knowledge" open for all. During the 2009-10 academic year, the federal government awarded $146. (5) billion in grants and loans to students through Title IV programs) Title IV funds go toward programs at every degree level, to traditional and nontraditional students, and to students at public, private nonprofit, and private for-profit colleges and universities alike. (6)
Indeed, a significant share of those funds has gone to students at for-profit institutions. During the 2009-10 academic year, the for-profit sector received $32 billion in Title IV student aid--more than 20 percent of all federal aid. (7) These institutions have been instrumental in expanding access to higher education for populations historically underserved by public and nonprofit institutions: adult nontraditional students, students from disadvantaged economic backgrounds, and members of minority groups. (8) But for-profit institutions are also strongly correlated with poor student outcomes. Compared to similar students at nonprofit institutions, students at for-profit institutions are more likely to fail to complete a degree, carry more onerous student-debt loads upon graduation, and default on student loans. (9) Due in large part to these poor student outcomes, many for-profit institutions frequently find themselves in the news, characterized as unscrupulous or predatory, (10) leading to questions about the propriety of government support for some for-profit institutions. In fact, federal aid constitutes nearly all of the revenue of many of the most prominent for-profit institutions. (11) Unfortunately, current law incentivizes the practices of the for-profit sector that lead to negative outcomes. Much like lenders in the subprime mortgage market, for-profit institutions find themselves in a position to benefit handsomely from the debt of marginally creditworthy borrowers without bearing any accompanying risk.
This Note examines the interaction between the Title IV student aid program and the for-profit higher-education industry. (12) Ultimately, Title IV's portable-subsidy student-aid model lies at the root of the problems associated with many for-profit institutions. …