By Jake McKinney
In 1993, the Associated Press ran a story by business reporter Rob Wells called “Fewer Choices Lead Minority Borrowers to Lousy Deals.” In his story, Wells captured how subprime lenders pushed impoverished Americans into unfair loan agreements with absurd interest rates.
Wells may not have known it at the time, but he was onto something.
Unfair lending practices from subprime lenders was only beginning in 1993. The eventual fraudulent credit ratings and securitization of subprime loans was something only a few journalists saw before the housing collapse in 2008 and subsequent recession.
“I wasn’t getting any traction covering mortgage derivatives,” Wells said. “I wish I had not dropped the story like I did.”
The housing crisis was real, and it was big. The United States government pumped $700 billion into softening the mortgage blow in 2008 alone. With the S&P 500 recovering since its lows in 2009 to the highest levels in history in 2015, some consumers wonder what will shock the U.S. economy next.
Some experts believe that shock will come from student loan debt.
On April 7, 2016, The Wall Street Journal ran a story by student debt reporter Josh Mitchell titled “More than 40% of Student Borrowers Aren’t Making Payments.” In Mitchell’s piece, he revealed that 43 percent of roughly 22 million Americans with federal student loans were either behind or received permission to postpone payments due to economic hardship as of Jan. 1.
Mitchell said while he sees similarities between the mortgage and student debt crises, they are different in key ways.
“There are a lot of parallels, but I do not think they are exactly the same,” Mitchell said. “One of the big parallels is that there was this notion that home ownership is a great investment — everyone should have a home. If you can get in a home regardless of your background, you should get in a home.”
Mitchell said it has become the same way with student loans.
“I’ve talked to so many people who have said, ‘I took out student debt or borrowed for my kids to go to college because I always had this thought in my mind that college was this sure fire investment that would pay off,’ Mitchell said. “I think people are coming around to the reality that student debt is not risk free. There are very very big risks. If you choose the wrong school or wrong major, you could end up upside down, having a lot of trouble paying off your debt.”
Other journalists may have seen these parallels — loose lending, government sanctioned expansion of the debt and little underwriting — but most journalists cited Federal Reserve statistics, noting that $1.2 trillion in student loans does not even come close to the size of the mortgage market at its peak of $14.8 trillion in the second quarter of 2008.
Student Debt Coverage since the Housing Crisis
On Aug. 9, 2010, The Journal published Mary Pilon’s story “Student-Loan Debt Surpasses Credit Cards.” Student loan debt became the second largest source of household debt in the United States behind only mortgage debt.
Kelly Evans of CNBC wrote in her story titled “Student-Loan Delinquencies Now Surpass Credit Cards” on Nov. 27, 2012 that student loan debt had become the largest source of delinquent borrowers by the first quarter of 2012.
Since then journalists have taken common angles on student debt. Coverage of dropouts and for-profit university students as being the likely candidates to default on their loans has soared.
Ylan Mui and Suzy Khimm of The Washington Post reported in 2012 that 30 percent of student loan borrowers were dropping out of school in their story titled “College Dropouts Have Debt but No Degree.” They were ahead of most of their colleagues as many similar stories appeared in other publications in 2015 such as Susan Tompor of USA Today’s story titled “College Students Nightmare: Loan Debt and No Degree.”
Josh Boak, an economics writer for the Associated Press, wrote a different kind of story on student loans on Oct. 5, 2015. His piece titled “A Multigenerational Hit: Student Debt Traps Parents and Kids,” showed student debt from the perspective of families of college graduates rather than that of dropouts or students at for-profit universities.
“Gen-X parents who carry student debt and have teenage children have struggled to save for their children’s educations. The average they have in college savings plans is just $4,000, compared with a $20,000 average for teenagers’ parents who aren’t still repaying their own school loans, Pew found. A result is that many of their children will need to borrow heavily for college or pursue cheaper alternatives, thereby perpetuating a cycle of family debt,” Boak wrote.
He said he strives for different angles that different consumers will care about.
“Coverage has to move beyond the borrower to systemic challenges,” Boak said. “People are seeing college as a necessity, not an option anymore, because incomes are falling for high school graduates. It’s the price of entering the U.S. economy. The deficit is going to be going up and baby boomers will be maxing out social security and Medicare while a huge forgiveness of student debt could occur. Which leaves the question, what programs is the government going to cut?”
Boak said student loan debt gets a fair amount of coverage, but it’s still not enough. For example, economics, policy and education beat reporters at the Associated Press cover student debt, but there is no reporter assigned to student debt specifically.
Mitchell said he believes the topic is getting enough coverage, but not the right kind.
“Too much of coverage paints student debt with a broad brush, but doesn’t specify what the actual crisis is,” Mitchell said. “A lot of reporters and politicians point to people with very high debt burdens—and in some sense there is a big problem there—but a lot of them are graduate students that will end up with very high incomes. It’s actually the people with very low debt burdens, around $9,000 or so, that are defaulting on their loans.”
Wells said coverage has to incorporate consumers’ choices.
“Many of us correctly focused on the predatory lending practices of lenders and misleading activities of banks, but we also need to examine what the consumers have done, and how some got in over their heads,” said Wells. “This isn’t a ‘bash the consumer’ story, like we heard in 2008 from some people on cable TV. But the consumers’ role and their level of financial literacy are important questions.”
For-Profit Education and the Media
On May 27, 2010, Mother Jones published “Steve Eisman’s Next Big Short: For-Profit Colleges.” Reporter Andy Kroll wrote about how one of the main characters of Michael Lewis’s nonfiction book and now feature film, “The Big Short,” predicted the next shorting opportunity following his vast success shorting the subprime mortgage market.
“Eisman saved the ugliest part for last: As he sees it, the industry’s era of massive profits — ITT is more profitable on a margin basis than Apple, he notes — are about to end, thanks to new government regulations in the pipeline,” Kroll wrote. “He predicts big hits to the per-share earnings of Apollo Group, ITT, Corinthian Colleges, Education Management Corp., and the Washington Post Co. — which owns and relies on Kaplan for profitability.”
Eisman was correct.
Apollo Education Group Inc., the parent company of the University of Phoenix, was trading at a 15-year low at $6.38 per share on January 11, 2016. The stock price had not seen lower prices since March 15, 1996 when it closed at $6.17 per share. The stock plummeted 92.8 percent from its highest point in 2009.
ITT Educational Service Inc. closed at $2.19 per share on April 25, 2016, the lowest the stock has been since Jan. 4, 1995 — a date just 15 days after the stock was originally offered to the public. The stock tanked 98.3 percent since its high in 2009.
DeVry Education Group Inc. was trading at a 10-year low on April 7, 2016 at $16.74 per share. The stock has not seen lower prices since March 4, 2005 when the closing price was $16.31. The stock fell 76.4 percent from its high in 2010.
Corinthian Colleges filed for bankruptcy, as reported by the Huffington Post’s Shahien Nasiripour on May 5, 2015. Education Management Corporation (EDMC) faced significant financial problems, including a 99 percent drop in the value of its stock and a defaulted bond rating (to junk bond status). Moody’s credit rating service in Jan. 2015 dropped EDMC to its lowest rating, D-PD. EDMC’s CEO, Edward West, resigned from the company on Aug. 28, 2015, “to pursue other interests.” The company was never profitable under his leadership.
Various publications warned of the impending doom of for-profit colleges. The Atlantic’s Derek Thompson equated the education market to a bubble in his piece titled, “For-Profit Colleges: First and Last Victims of Higher Education ‘Bubble’?” published on June 1, 2011.
Despite poor performance in the stock market, are for-profit institutions to blame for the amount of consumers in default on their student loans?
“It is undeniable that for-profit colleges really do account for a disproportionate amount of defaults,” Mitchell said. “One thing that the media has not covered enough is what causes that. The big question is how many of the defaults are because the students come unprepared and come from disadvantaged backgrounds versus the schools just doing a bad job of teaching. We need to know what the appropriate expectations are for for-profit schools given the fact they are taking in a lot of disadvantaged students that are probably not academically prepared.”
Mitchell said that the problem at for-profit colleges is not isolated.
“The thing that gets lost in the discussion is that a lot of the problems in the for-profit schools are present in the public schools and the graduate schools—the law schools especially,” Mitchell said. “There has been a narrative that all for-profit schools are bad and are the main source of the problems, but what has been lost is that these problems exist elsewhere in education as well.”
Spencer Jakab, the “Ahead of the Tape” columnist for The Journal, has been covering Apollo Education Group for several years.
Jakab said coverage of for-profit education has been fair even though it has been negative. Journalists are just pointing out the facts and the tone is warranted based on those facts.
“The companies are very defensive of course,” Jakab said. “I have written about most of them from the investors’ angle. The view — and I think rightly so — is that the companies are doing something wrong.”
Jakab went on to explain difficulties in covering for-profit education as a columnist.
“What’s hard for editors and colleagues sometimes to understand is when you write about one of the companies as an investment opportunity, you have to separate that from the social and personal finance issue of personal debt,” Jakab said. “If I am writing an Ahead of the Tape column and I happen to say something positive, it is not an endorsement of their business model. It is a completely separate issue. When I write negatively about them, I’m not attacking poor working class people and denying them the opportunity for them to get an education. I think people need to understand that, but they don’t.”
Officials at the University of Phoenix, DeVry Education Group Inc. and the Association of Private Sector Colleges and Universities did not respond to a request for comment.
If Not For-Profits, Who is to Blame?
Department of Education projections show the government will make a $135 billion profit from 2015 to 2025 on student loans as reported by Money’s Alexandra Mondalek.
Mitchell said he is not so sure.
Controversy surrounds the accounting practices of the Congressional Budget Office (CBO). By law, the government can recognize gains from student loans at fair value, according to Politifact reporter Tom Kertscher. But if a more “comprehensive” accounting method is used, such as the one proposed by the CBO that accounts for potential economic downturns that could result in more defaults, that $135 billion in profit could turn into an $88 billion loss.
“The government, in essence, has become one of the biggest lenders in the country almost overnight,” Mitchell said. “Before 2010, there was a federal loan program where private banks administered the loans and government agencies only guaranteed those loans. But since then, the government has become the actual lender of those loans. So the government has this huge portfolio on its books and it doesn’t really have much experience or expertise running a loan program of this size.”
Wayne Johnson is the director of guaranty agency and repayment services at the North Carolina State Educational Assistance Authority (NCSEAA). The NCSEAA is the guarantor of loans serviced by the College Foundation Inc. (a non-profit), which was funded by the Department of Education through the Federal Family Education Loan Program before its termination in 2010.
“We can see from financial statements, people are in difficult times,” Johnson said. “That is why we have provided a way to avoid default through a minimum repayment plan.”
The NCSEAA had a three-year default rate of 5.26 percent on its $294 million in loans as of the end of 2015, significantly below the national average of 11.8 percent.
Johnson noted there is no underwriting procedure except for vocational loans — loans that are supplied by the government and forgiven in exchange for an agreement to enter a profession within the state.
“I don’t think student debt is an economic crisis,” Johnson said. “The cost of education is up and people are more likely to default because they owe more money.”
Tuition at private non-profit and public colleges has increased by 11 and 13 percent respectively over the past five years, according to The College Board.
Wells said he is concerned there are no underwriting standards for student loans. He compared it to the incorrect credit ratings dubbed to subprime mortgages. However, he noted it would be difficult to tell if an 18-year-old kid will be able to pay back his loans by typical underwriting methods.
Boak said he sees the problem as a matter of assumption of risk.
“The institution of higher education benefits from the debt, but there is very little risk in the same way that the originators of subprime mortgages bore none of the risk from bad lending practices,” Boak said. “At some point when you have debt, the parties involved have to find ways to bear the risk or there will be problems with that debt. Ultimately what happened with the housing crisis is all of society bore the consequences from that risk. The closest parallel is that since the taxpayers are the primary providers of student debt and if that debt is not repaid because people don’t have the incomes, society will bear that expense as well.”
Average Americans can expect that a bailout of student loans is possible, not probable, said an undisclosed Federal Reserve employee familiar with the matter. While delinquency and default rates are up, a bailout won’t hit the consumers wallet in the same way the housing market collapse did. What is more likely is that an economic downturn could cause a government bailout of defaults, which could result in cuts in other government funded programs, which will affect the everyday American in one way or another, she said.
Jake McKinney is a senior at UNC-Chapel Hill minoring in business journalism