Graduation day should have been a happy one for Tyrone Bailey. The first in his family of three children to earn anything beyond a high-school diploma, Bailey, 24, received a bachelor's in criminal studies from Westwood College in Torrance, Calif., two years ago. But even while the day's pomp and circumstance played out, his thoughts turned quickly to the tough job market and the $20,000 in loans he borrowed directly from his alma mater that were set to accrue a whopping 18 percent interest rate.
Not long ago, low-interest student loans were as easy to come by as a pass to get out of gym class. But the economic downturn and ensuing credit crunch put an end to that. As relatively cheap, private bank and federally backed loans became harder to come by, some colleges, vocational schools, and online institutions filled the void by lending directly to students like Bailey. Loans from traditional sources like Student Loan Marketing Corp., commonly known as Sallie Mae, fell by more than 50 percent from 2007–08 to 2008–09 after years of rapid growth, according to the College Board. (Article continued below...)
Since they're largely unregulated and come from many sources, the rise of direct school-to-student loans are hard to estimate on a national level. "It's a new twist that in the proprietary-school sector, schools are making their own loans," says Deanne Loonin, who directs the National Consumer Law Center's Student Loan Borrower Assistance Project. For example, Westwood, which operates 17 campuses nationwide and offers online-degree programs as well, hands out direct loans to about a quarter of its 17,000 students. Like most privately held companies, it isn't required to disclose just how much money it loans out. But it's likely similar to schools like Corinthian Colleges, the Santa Ana, Calif.–based owner of Everest College and WyoTech chains, whose direct-lending division is expected to make $140 million for the school during the current fiscal year. Then there's ITT Educational Services, which, according to SEC filings, generated $52 million from its in-house student-loan program. (ITT didn't respond to NEWSWEEK's request for comment, and neither school makes its interest rates public.) Career Education Corp., which runs campuses under a variety of names (including the Brooks Institute, American InterContinental University, and Sanford-Brown Institutes and Colleges), has expanded an existing program over the last year, says Jeff Leshay, senior vice president for corporate communications. The program now brings in about $34 million annually, still a small percentage of total revenues, which the school projects will be $1.75 billion for the year. That program charges interest rates between federal level and market rate for private loans.
Consumer advocates see nothing wrong with schools that offer to help finance their students' educations. It's rates as much as 10 percent higher than federal student-loan rates that have them worried. Before the recession and credit crunch hit the student-loan market, it wasn't uncommon to see federally backed loans hovering around 3 percent or even lower. For qualified students, 8 percent bank loans are still common. Mark Kantrowitz, publisher of Finaid.org, says it's hard to estimate the average private student-loan rate, but he said most loans are in the low double figures. Eighteen percent, however is near predatory and driven by a pure profit motive, says Loonin. "The [traditional] lenders pulled out for now, and [some] schools were searching for ways to continue to have their students pay the same kinds of tuition," says Loonin.
Students who attend online colleges or vocational schools are often the ones who need the most tuition financing and the ones least able to afford the high interest rates charged by direct school-to-student loan programs. They tend to have worse credit than students at traditional schools and are less likely to convert their diplomas into high-paying jobs. "They're students who probably didn't do well in high school, they probably didn't sit in the front, and they've probably never taken an SAT class," says Gil Rudawsky, a spokesman for Westwood. "Their finances are probably not as stellar, and they probably don't have help from the parents. A lot of times it's the difference between whether a student goes to college or not."
But that empathy didn't always jibe with Westwood's loan program. At least not while it was charging Bailey and other graduates 18 percent interest on their student loans. Bailey is one of four former students who were named as plaintiffs in a class-action lawsuit in May against Westwood's parent company, Denver-based Alta Colleges, alleging that the administration made unrealistic job-placement promises, issued deceptive statements about the school's accreditation, and was not sufficiently clear about the high interest rates the school charged on its direct-loan program.
Westwood's Rudawsky says the suit is "98 percent fiction" and notes that the school requires students max out government loans and grants and private options before turning to the school for financing. Following the controversy, the school has dropped its rate to 10 percent for new and incoming students and to zero for existing students and graduates. Rudawsky maintains that its direct-loan program has suffered from a high rate of defaults and was not a moneymaker for the school.
But the school wasn't always so empathetic, according to Inez Morris, who was student-aid director at a Westwood campus near Atlanta for a year before being fired in 2006. She told NEWSWEEK that aid officers were instructed not to explain the full cost of a Westwood degree nor the terms of the loans. "I don't think [students] understood the interest rates, I don't think they understood that it was not a federal loan, or they didn't understand what they were signing," says Morris, who is working with the plaintiffs' lawyers in the class-action suit against Westwood. Often, she says, the loans were originated to close balances for students who had dropped out but had not paid for the time they spent at the school. She also adds that students discovered they had high-interest loans only when notified by a letter after leaving school.
Not all vocational, technical, or online schools charge as high an interest rate as Westwood did, nor do they structure their programs in quite the same way. DeVry, which charges 12 percent interest on its Educard loan program, says the school doesn't have the financial mechanism to run a complicated program with multiple rates. "We are an educational-services provider, not a bank," says DeVry spokeswoman Joan Bates. Apollo Group, owners of the University of Phoenix, is one school that has declined to offer direct-to-student loans. "[We] made the deliberate decision not to engage in private lending because, quite simply, we believed it was not in the best interests of our students," says Sara Jones, senior vice president for public affairs.
Rudawsky says Westwood gives students detailed descriptions of the financial-aid process, both in writing and verbally, and that financial-aid counselors help each student to fill out applications for federal aid. "Westwood goes above and beyond to create transparency for students and to walk them through every step of the process," he says.
Bailey says that process wasn't strong enough, and he says the interest-rate reduction doesn't cut it, either. "Here I am stuck with [$20,000] of debt and a degree that's useless," says Bailey, who is now working a near-minimum wage job at the Long Beach sanitation department while he works toward a master's degree online via the University of Phoenix. He says he couldn't get a job that would pay his loans, so he entered a new degree program in order to defer loan payments. According to Bailey, no traditional school was willing to accept his Westwood credits. That's common practice—most traditional nonprofit schools rarely accept transfer credits from for-profit institutions because of differences in the accreditation process. "I'm asking for my loans to be forgiven and for them to pay for education at a traditional school; I still want an education so I can start a career."
The Westwood case aside, the direct-to-student loan market is likely to continue growing. Consumer advocates like Loonin say they hope a proposed consumer-finance-protection agency might crack down on the way such loans operate. But with regulatory efforts tangled up in higher-profile causes like credit-card reform, high-interest loans may be on the tenure track.