Are Subprime Educators Encouraging Predatory Lending?

Jonathan Ginsgberg’s Recent Post, “How do I Qualify for a Hardship Discharge on My Student Loan?” introduces another bad actor into the emerging student loan debacle – the for-profit educational institution that provides services of questionable value while steering student borrowers towards high-cost private loans.  Ginsberg’s correspondent described in the article, a disabled woman on Social Security, is being hounded by creditors for loans taken out to pursue an online degree program at the University of Phoenix.  Unfortunately, in many cases like this, a bankruptcy is no help.  A legislative remedy is needed.

The University of Phoenix runs one of the most prominent and persistent of a number of online educational programs which advertise heavily over the internet, using the same channels and techniques favored by subprime mortgage lenders.  Judging from their website, they provide a valuable service to people who need coursework to maintain an occupational license or qualify for a promotion, but find it difficult to attend classes.  They also offer conventional classroom instruction at several locations.  At least part of this operation seems to be perfectly legitimate.

That part of the online program which advertises a smorgasbord of tempting careers and is ready to sign up virtually anyone who applies is more questionable.  An educational institution which admits a student and collects fees without ascertaining whether the student has at least a reasonable chance of profiting from the education is rather like a mortgage broker flogging a ninja (no income, no job, no assets) mortgage to a person he knows cannot make the required payments.  Through its guaranteed student loan programs, the Federal Government has endeavored to discourage this practice by refusing to underwrite loans to institutions and programs with high default rates.  Those institutions and programs may, however, still be able to offer private loans at higher rates, with the lender relying on non-dischargeability in bankruptcy and other exceptions to protect his investment.

This University’s website discusses federally-funded student loans in some detail, with this caution at the end: “not all students and all programs are eligible.”  Amounts of tuition and fees are not listed on the website.  Might this not be a case like that common in the  mortgage industry, where a person has gone through the application process and has made plans based on his or her acceptance into a program before he is presented with a full accounting of its costs?  At what point does the student who has applied for, and been admitted to a nonqualifying program learn of the loan bait and switch?  The disclosure rules on student loans are woefully inadequate to protect the sorts of people targeted by glitzy online sales pitches – the unemployed and underemployed, people with physical limitations, and people who do not manage their own affairs very well and lack a support network of real live friends to whom they can turn.

The big difference between student loans and unwieldy home loans is the inability of most borrowers to rid themselves of the resulting debt.  Federal student loans can follow the borrower to the grave.  They have no statute of limitations and can be collected from the estate of the borrower even after death.  Discharge of the debt in bankruptcy is very difficult for a student loan borrower in many jurisdictions due to an unnecessary and unreasonably harsh interpretation of the statutory language limiting discharge of this type of debt.