Education Department Shuts Down ITT Tech

Source: https://www.forbes.com/sites/prestoncooper2/2016/09/07/education-department-shuts-down-itt-tech/

by: Preston Cooper | Published: September 07, 2016

For-profit giant ITT Technical Institute, which operates over 130 U.S. schools serving 45,000 students, announced that it will shut down for good. This comes on the heels of its announcement last week that it would no longer enroll new students, which in turn followed the Department of Education’s move to bar it from receiving federal financial aid such as student loans and Pell Grants.

Last week I wrote that the uncertain status of the then-not-yet-closed ITT Tech left students with a Catch-22. Current students could remain enrolled at ITT Tech with the hope that the school would close and they would become eligible for a closed school discharge. Or, they could withdraw from ITT Tech and enroll in a different school, but potentially give up the opportunity for loan forgiveness if they transferred their ITT Tech credits or withdrew more than 120 days before the school officially closed.

All options presented serious risk for students, and the closed school discharge created a perverse incentive for students not to try and complete their education elsewhere. To spare students this Catch-22, the Department of Education seemed to want to force a shutdown of the school as quickly as possible—and it did just that.

The Department demonstrated its ability to bring down a school in a matter of weeks. The Department required ITT Tech’s parent company to post a letter of credit worth $153 million—on top of the $94 million the school had already posted—to provide a buffer against closed school discharges. At the same time, the Department forbade the school from enrolling new students on federal student aid. The double hit—cutting off the school’s main source of revenue while dramatically boosting their collateral requirements—was, predictably, too much for the school to survive.

The Department was not necessarily unjustified in its actions. This is not a traditional case of government meddling with the free market. ITT Tech was receiving substantial taxpayer subsidies in the form of student loans and Pell Grants, so it is perfectly reasonable, if not desirable, for the Department to attach conditions to such largesse. But it is also reasonable for taxpayers to wonder whether the Department has been an effective steward of their money.

Closed school loan discharges from ITT Tech will amount to $485 million — only a fifth of which will be covered by the school’s collateral. While only current students and recent dropouts are eligible for discharges, that could change. Massachusetts Attorney General Maura Healey is suing the school for allegedly defrauding students about its job-placement rates. Healey’s lawsuit could presage graduates of ITT Tech becoming eligible for loan forgiveness on the grounds that they were defrauded—potentially multiplying taxpayer losses. It is easy to imagine the total student bailout for just ITT Tech exceeding $1 billion.

All this raises the question of whether the Department even did its homework before extending billions in taxpayer-backed loans to ITT Tech in the first place. The school had many of the warning signs of a poor-quality institution: aggressive recruiting tactics, high dropout rates, low loan repayment rates, grade inflation, and a large percentage of revenue derived from government subsidies. The school’s accreditor, which acts as a gatekeeper of taxpayer aid money and supposedly considers whether the school actually provides a good education, greenlighted the accreditation of many other poor-quality schools. The school’s main virtue appears to be its age—having existed since 1969, evidently no one thought to make sure it was still living up to its promises.

After all, why should anyone hold the school accountable? The Department of Education does not spend its own money—it spends yours. There is no incentive for the Department to allocate those resources wisely. Should it lose half a billion dollars to the collapse of a giant such as ITT Tech, the Department will face no financial repercussions. The political objective—make sure everyone can go to college, even if that “college” might be a shady institution that could go down in flames—far outweighs the goal of financial responsibility. Then, when the problems with a school to which the Department has given money become too big to ignore, the school gets shut down almost instantly and its students get a bailout.

While the Department can issue new regulations to proactively curtail lending to questionable colleges, one wonders whether it can ever be an effective steward of taxpayer dollars so long as it has no real incentive to do so. In reality, only private sector lenders can provide real accountability to colleges. After all, if a private lender makes too many bad loans,it goes out of business. But under the current system, the government originates more than 90% of new student loans. The ITT Tech disaster shows us just how terrifying the results of the status quo can be.

Tags: Date-2016-09-07, America

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