For-Profit Schools Facing Aid Crunch

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Subprime-Like Disaster Averted?

The immediate fallout from Sallie Mae's move is limited to the small contingent of for-profit schools. Although it is the largest of the student lenders, only 3% of Sallie Mae's total portfolio goes to subprime lending, accounting for less than 1% of the 6,000 schools they work with. Beyond such for-profit programs, access to higher education is unaffected by Sallie Mae's move, say financial aid experts. "Some of the for-profit schools like Corinthian are sounding the alarm…and hoping someone will come to the rescue, but it doesn't look like they are going to have a lot of company," says Robert Shireman, executive director of the Project on Student Debt, a group that focuses on student financial aid.

In fact, the move is a step in the right direction, say some aid experts—a sign the markets have corrected themselves before impending disaster, as housing's subprime meltdown has revealed all too well. "The analogy to subprime [mortgage] practices is really quite stunning," says Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars & Admissions Officers. "What goes up must come down, and here we have the laws of financial gravity in our favor." Some education watchers note the move may also force some underperforming schools to up their graduation rates to continue some loan funding for students.

The for-profit career colleges are quick to point to the disadvantage low-income, nontraditional students face as a result of the pullout. Miller, from the Career College Assn., says the recent move could lead to a potential crisis where the lowest-income students are unable to pay for college. In response, private for-profit schools are looking for Congress to increase low-interest federal loans available to nontraditional students.

This week, the House is expected to consider a financial aid bill that will address the issue of accessibility for nontraditional students. The legislation would give part-time and nontraditional students more access to aid by making Pell Grant scholarships available year-round. It would also tighten regulations on lenders, requiring them to disclose all terms and conditions to borrowers up front and report private loans of $1,000 or more to students' schools. The bill would also encourage more students to apply for federal aid by simplifying the process and cutting down on the number of questions on the Free Application for Federal Student Aid.

Alternative Lending

In the meantime, schools have taken matters into their own hands. Corinthian is looking at alternatives including giving loans directly, finding new lenders to work with, and guaranteeing high-risk loans against default. Career Education Corp. is making similar moves and ITT Educational Services (ESI) recently agreed to work with three new lenders after learning about Sallie Mae's cutbacks.

Such increased financial risks for schools will likely raise costs for new students. While larger for-profits including Corinthian, Career Colleges, and ITT can absorb the additional costs at least in the short term, the smaller to midsize for-profit schools that attract blue-collar students will have more trouble.

At Indiana Business College (IBC), which has campuses throughout the state, roughly 40% of students take out subprime student loans, with anywhere from 50% to 65% of these borrowers getting their loans from Sallie Mae, says IBC's Chief Financial Officer Robert Herzog. "When Sallie Mae makes a move like this, it makes a big impact," Herzog says. The college is looking into new lenders to take Sallie Mae's place. "I don't have any doubt that there will be other avenues for us to look at, but it will come at a higher cost for the students and for the institutions."

But all around, financial aid experts agree federal—not private—loans are not used enough by those who need them most. Students should be sure to take out their limit in federal Stafford or Perkins loans, and if parents can, they should also consider taking out a PLUS loan, which is available even in the absence of much credit history. Kal Chany, author of Paying for College Without Going Broke, says the Stafford loan is not taken advantage of by enough people who qualify for it, which is virtually everyone.

If students have exhausted all possibilities and still have a substantial financial gap in need of filling, Hawkins, from the National Association for College Admission Counseling, has one final bit of advice: Haggle or look elsewhere for cheaper alternatives. Says Hawkins, "If a student needs to borrow beyond what's available by the federal government, it's a sign that they should really press the school on what is being offered in terms of financial aid."

Porter is a reporter with BusinessWeek in New York. Prior to this position, she worked for The Chronicle of Higher Education in Washington, D.C. Porter has a bachelor's degree in English from Brown University.