Comment by TomOfTTB | Hacker News Reader

Comment by TomOfTTB | Hacker News Reader

I don’t see this as that big a deal. It’s bad but it’s the bad part of a good cycle. Essentially the traditional University system didn’t bother to adjust it’s curriculum to the real life needs of students. So a bunch of private companies rushed in to fill that void.

These people (ITT Tech, Devry, University of Phoenix) are the startups in many ways. They were willing to take a risk when no one knew if there was any profit in private education and as a reward for that they’re making a big return on investment. But now that the doors are open to private endeavors and it’s clear you can make money there’s going to be competition and that makes everything better. You already see signs of this (Most notably in the incredible achievement that is Western Governors University: http://en.wikipedia.org/wiki/Western_Governors_University)

Right now there’s an artificial stigma that’s still keeping a lot of the internet based competition down but as that begins to fade there will be no way for companies like ITT Tech to maintain their huge profit margins.

Education quality is a red herring: the real concern is the abnormally large amount of student debt tied to these schools. When the student loan bubble burst (and believe me, it will), these schools are going to suffer as their customers opt for more affordable learning at community colleges and state universities which are increasingly offering distance-learning programs. But that's not even the bad part.

The bad part: like the subprime mortgage crisis, when enough people default on loans, and lending standards tighten, it will send ripples through the credit market impacting the entire economy. And like the subprime crisis you can anticipate a government bailout towards the student loan industry as so few people can afford to out-of-pocket their education in the United States.

It's going to be messy.

How can the student debt bubble burst and hurt the school? The vast majority of the debt is backed by the government and survives bankruptcy. At some point the growth curve for these schools will slow down, but that's the case for all institutions that grow faster than the economy at large.

> How can the student debt bubble burst and hurt the school?

Because for-profit educational institutions don't have large endowments to bankroll them through tough times and are completely dependent on revenues from continued enrollment. If student debt becomes more difficult to come-by, and/or the government tightens the criteria for student loans, these schools will see their enrollment drop as a significant portion of their clientèle will be unable to afford their services.

These for profit schools are the low cost carriers of the education world. Changes to student aid would harm traditional private schools much more dramatically because they have far tighter margins much like how rising fuel costs impacted the Aviation industry. And while federal funds prop up the secondary education system, they can continue to prop up an industry for decades ex: corn farmers.

Individually they may be susceptible to loss of accreditation, however without the massive legacy costs they are far more capable of jumping though new hoops. I would suggest rather than being dependent on an unstable bubble they are exploiting the inefficiency’s of an entrenched industry.

PS: There is a difference between profiting from a bubble (Home Depot) and being dependent on it (Lehman Brothers).

You can't default on a student loan (unless you die or something).

Not true. You most certainly can default on a student loan, even those held by the Department of Education.

I think he or she meant that it is very difficult to get student debt expunged from your record. You can certainly default and even declare bankruptcy but the student debt will remain in most cases.

I think you mean: you can't discharge a student loan through bankruptcy. You're in default the moment you miss a payment.

And if the problem comes at the scale this theory is suggesting, then like mortgage defaults, people may just ignore the collection notices until they get special accommodations.

They can mess up your credit, sue you, and seize the money from your bank account, or get the money the witheld from your paycheck.

Theoretically, yes. But practically, if too many people default, they can't. As with recent home mortgage default levels.

If you default on home mortgage they don't get to sue you, and seize the money from your bank account. Also if you die, the government does not pay off that debt.

A foreclosure is in many jurisdiction an expedited lawsuit.

And some mortgage loans, in some states, are full recourse -- they can go after other assets (including bank balances) and paychecks. That they often don't reinforces my original point: there are plenty of levers creditors theoretically have that can't practically be employed against mass defaults and poor/unemployed people.

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