For Profit Schools Turn Students Into Debt Zombies; It's Time To Kill The Entire Pell Grant Program

If president Obama gets his way, still more money, up to $50 billion, will be thrown at the failed Pell Grant system. Pell Grants are based on a means test and the funding comes with no strings attached. The money does not have to be repaid. That alone should tell you the program is rife with fraud. And it is.

Regardless of grades, ability, or likelihood to graduate, students can apply for the money, take it and run, without ever attending one day of class. Many do.

Those who do use the money for education, as apposed to partying and drugs, frequently waste it on useless degrees that leave students deep in debt after graduation, assuming of course the students even graduate.

Obama Wants To Throw More Money Down This Obvious Sinkhole

Let's start off with a review of the most recent proposal as described by the Washington Post in New funding projection could squeeze Obama's education agenda.

Sen. Tom Harkin (D-Iowa), chairman of the Health, Education, Labor and Pensions Committee, said told reporters Thursday that the measure he seeks to enact would channel more than $50 billion into Pell grants. That's up from the House-passed bill's total of $40 billion. In addition, Harkin indicated that the increase in the maximum Pell grant award would be less than the House envisioned. Instead of rising from the current $5,550 to $6,900 over the next decade -- as the House bill projects -- Harkin said the maximum annual award would rise to between $6,300 and $6,500.

Harkin said annual Pell award increases would be tied to inflation, but he omitted mention of a provision in the House bill that would tie the increase to inflation plus one percentage point. Lobbyists say they believe the additional percentage point will be dropped in final negotiations.

Student Debt Zombies

Inquiring minds are reading the New York Times article In Hard Times, Lured Into Trade School and Debt.

One fast-growing American industry has become a conspicuous beneficiary of the recession: for-profit colleges and trade schools.

At institutions that train students for careers in areas like health care, computers and food service, enrollments are soaring as people anxious about weak job prospects borrow aggressively to pay tuition that can exceed $30,000 a year.

�If these programs keep growing, you�re going to wind up with more and more students who are graduating and can�t find meaningful employment,� said Rafael I. Pardo, a professor at Seattle University School of Law and an expert on educational finance. �They can�t generate income needed to pay back their loans, and they�re going to end up in financial distress.�

For-profit trade schools tell people "If you don�t have a college degree, you won�t be able to get a job,� said Amanda Wallace, who worked in the financial aid and admissions offices at the Knoxville, Tenn., branch of ITT Technical Institute, a chain of schools that charge roughly $40,000 for two-year associate degrees in computers and electronics. �They tell them, �You�ll be making beaucoup dollars afterward, and you�ll get all your financial aid covered.��

Ms. Wallace left her job at ITT in 2008 after five years because she was uncomfortable with what she considered deceptive recruiting, which she said masked the likelihood that graduates would earn too little to repay their loans.

As a financial aid officer, Ms. Wallace was supposed to counsel students. But candid talk about job prospects and debt obligations risked the wrath of management, she said.

�If you said anything that went against what the recruiter said, they would threaten to fire you,� Ms. Wallace said. �The representatives would have already conned them into doing it, and you had to just keep your mouth shut.�

The Career Education Corporation, a publicly traded global giant, last year reported revenue of $1.84 billion. Roughly 80 percent came from federal loans and grants, according to BMO Capital Markets, a research and trading firm. That was up from 63 percent in 2007.

The Apollo Group � which owns the for-profit University of Phoenix � derived 86 percent of its revenue from federal student aid last fiscal year, according to BMO. Two years earlier, it was 69 percent.

For-profit schools have proved adept at capturing Pell grants, which are a centerpiece of the Obama administration�s efforts to make higher education more affordable. The administration increased financing for Pell grants by $17 billion for 2009 and 2010 as part of its $787 billion stimulus package.

When Andrew Newburg called the Le Cordon Bleu College of Culinary Arts in Portland, Ore., to seek information, he was feeling pressure to start a new career. It was 2008, and his Florida mortgage business was a casualty of the housing bust. An associate degree in culinary arts from a school in the food-obsessed Pacific Northwest seemed like a portal to a new career.

The tuition was daunting � $41,000 for a 15-month or 21-month program � but he said the admissions recruiter portrayed it as the entrance price to a stable life.

�The recruiter said, �The way the economy is, with the recession, you need to have a safe way to be sure you will always have income,� � Mr. Newburg said. � �In today�s market, chefs will always have a job, because people will always have to eat.� �

According to Mr. Newburg, the recruiter promised the school would help him find a good job, most likely as a line cook, paying as much as $38,000 a year.

Last summer, halfway through his program and already carrying debts of about $10,000, Mr. Newburg was alarmed to see many graduates taking jobs paying as little as $8 an hour washing dishes and busing tables, he said. He dropped out to avoid more debt.

There is much more in the 3 page article worth reading. Give it a look. Also consider this image from the article.



Leah Nash for The New York Times

Susana Holloway of Le Cordon Bleu�s culinary school in Portland, Ore., where a 15- or 21-month program costs $41,000.

Pray tell what are the odds a fancy restaurant hires someone out of one of these programs? 2%? 1%? .25%?

Many students graduating such programs will get a job washing dishes or flipping burgers. No doubt the culinary schools will call that a successful placement.

Pell Grant Controversy

Wikipedia has this to say about the Pell Grant Controversy.

The primary controversy is that a small set of educational institutions comprising 6% of all college students receives roughly 20% of all Federal Pell grant money. University of Phoenix tops this list with Pell Grant revenue of $656.9 million with second and third place held by Everest Colleges at $256.6 million and Kaplan College at $202.1 million for the 2008-2009 educational year[5].

This is combined with accusations of predatory loan practices on students by the highest Pell Grant recipient, University of Phoenix [6]. Additionally, some of the universities that are top recipients of Pell Grants have low completion rates, so students leave with no degree and large indebtedness leading some former students to accuse recruiters of being "duplicitous" [7].

Top recipient University of Phoenix received $3.2 billion in federal moneys of all kinds in 2008, and these federal dollars provided 86% of its revenue (thus, roughly 20% of its revenue came from Pell Grants)[8]. University of Phoenix has, among similar online universities, the lowest graduation rate tabulated by OEDB at 4% compared to the median of 37% and a high of 84% for Champlain College

Time To Kill Pell Grant Program

Rather than throwing hard earned taxpayer dollars at programs that invite fraud and make debt zombies out of students, it's time to kill the program entirely. Instead, Obama wants to expand the fraud, even indexing the fraud to inflation.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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