A report issued by the National Consumer Law Center on Monday describes how many for-profit schools began making costly private student loans after third-party lenders terminated their partnerships with the schools following the credit crash.
In "Piling It On: The Growth of Proprietary School Loans and the Consequences for Students," Deanne Loonin, director of NCLC's Student Loan Borrower Assistant Project, writes that the main problems with institutional loans include high default rates--more than half of the loans are never repaid--high costs, predatory terms and accounting "tricks and traps."
Loonin explains that such schools must show that at least 10% of revenues come from sources other than Department of Education federal student assistance (the so-called "90-10" rule), so they make the loans to fill up the 10% category and "[keep] the federal aid pipeline flowing."
However, she writes, students are often harmed by the loans. "Each failed loan represents an individual who cannot repay a debt and who may be facing aggressive collection tactics and damaged credit ratings. Piling more debt on students already buried in federal and third party private loans is hardly in the best interests of students even if it serves a company's bottom line."
The final section of the report contains recommendations for reform, including strengthening the "90-10" rule and increasing regulatory scrutiny on lending by for-profit schools.