We’ve talked before about how for-profit educational institutions pose a greater consumer risk than their nonprofit counterparts. That’s because students at for-profit schools graduate with more debt (more private student loan debt in particular) and, in some cases, less reputable degrees. The government just cracked down hard on ITT Tech, one of the nation’s largest for-profit colleges, and now potential students of for-profit institutions have a new concern—make sure the school you are considering offers federal student loan aid. ITT Tech is now banned from providing federal loans to new students, in a move by the federal government that some predict will bring about the end of the company.
What happened to ITT Tech and why?
Essentially, the Department of Education imposed sanctions on ITT Tech so that it cannot enroll new students who rely on federal financial aid to cover their tuition. This comes after compliance shortcomings, fraud lawsuits and other investigations into the company’s practices, and it comes at a time that the company is in serious financial turmoil. Additional penalties include a ban on raises and bonuses for executives, and the demand of a cash deposit as collateral, described by Bloomberg as “an additional $152.9 million in collateral to protect taxpayers from the cost of a sudden collapse.”
What about current students?
If you’re a current student at ITT Tech, you’re rightfully concerned about the future of your education. Be sure to check out these tips from the DOE, which help explain a few scenarios. Those scenarios essentially boil down to:
- Continue your courses. If you are already enrolled with federal aid, you should not experience a change in your financial aid package as a result of these sanctions. Note: if you were going to start at the school in the fall of 2016, this does not apply to you. You will not be eligible for federal loans.
- Transfer elsewhere. It’s unclear how easily ITT Tech credits will transfer.
- Wait. If ITT Tech were to collapse and close, you should be able to discharge your federal loans. This likely won’t help with your private loans, though, so if they represent a significant portion of your student loan debt, you may want to continue your education in order to earn a return on that investment.
Reminder: Why are federal loans so important?
Federal loans are great for students because they are flexible and offer safety nets. Interest rates are reasonable, and a good chunk of aid is typically available without needing a cosigner or parent support. Federal loans offer repayment programs based on your income after college, and are forgiven after 10 years for public servants. Overall, they tend to provide a much more realistic debt load than aggressive private loans.
So, attending a school that can’t even provide federal loans is just not a good idea. You’ll immediately be doing a disservice to yourself, and will face much tougher repayment pressure after graduation. But that’s not the real issue here. Leave the borrower benefits aside, and think for a moment about this: Why wouldn’t the government want to lend this money? Doesn’t the government love making money from student loans?
And that’s the real crux of the issue. In this move, the government is essentially saying that a degree from ITT Tech isn’t worth it—it’s too risky. The government no longer has confidence that a borrower from ITT Tech can repay their loans, which is the same thing as saying that a graduate of ITT Tech is unlikely to embark on a successful career and earn much money. It sounds harsh, but no student should want to attend a school that’s been deemed a failure in this way.
Here are some key takeaways that we can learn from ITT Tech:
- Always consider nonprofit colleges and universities first. In-state, public schools will be your cheapest bet. Remember, you can even start at community college and transfer after one or two years for additional savings.
- Be sure that the school you are attending offers federal loans. This is a must have.
- Cross reference any school you are considering with the College Scorecard.
- Maximize your federal loans and take out as few private loans as possible.
- Leverage the federal repayment programs after you graduate, as needed, to ensure you can pay off your debt comfortably while working toward other financial goals.