Steven Eisman testifies about the subprime nature of the for-profit education industry

Here is another must read from Steven Eisman in front of the US Senate Committee on Health, Education, Labor, and Pensions yesterday (June 24). I excerpt:

My testimony today comes largely from a recent presentation I gave at an investor conference entitled “Subprime goes to College”. The for-profit industry has grown at an extreme and unusual rate, driven by easy access to government sponsored debt in the form of Title IV student loans, where the credit is guaranteed by the government. Thus, the government, the students and the taxpayer bear all the risk and the for-profit industry reaps all the rewards. This is similar to the subprime mortgage sector in that the subprime originators bore far less risk than the investors in their mortgage paper.

The for-profit education industry accounts for 9% of the students, 25% of all Title IV disbursements but 44% of all defaults. And the President of the largest for-profit institution is paid nearly 25x the compensation level of the President of Harvard. There is something wrong with this statistical progression.

In the past 10 years, the for-profit education industry has grown 5-10 times the historical
rate of traditional post secondary education. From 1987 through 2000, the amount of total Title IV dollars received by students of for-profit schools fluctuated between $2 and $4 billion per annum. But when the Bush administration took over the reigns of government, the DOE gutted many of the rules that governed the conduct of this industry. Once the floodgates were opened, the industry embarked on 10 years of unrestricted massive growth.

He continues:

The bottom line is that as long as the government continues to flood the for profit education industry with loan dollars AND the risk for these loans is borne solely by the students and the government, THEN the industry has every incentive to grow at all costs, compensate employees based on enrollment, influence key regulatory bodies and manipulate reported statistics – ALL TO MAINTAIN ACCESS TO THE GOVERNMENT’S MONEY.

In a sense, these companies are marketing machines masquerading as universities. And when the Bush administration eliminated almost all the restrictions on how the industry is allowed to market, the machine went into overdrive. How do such schools stay in business? The answer is to control the accreditation process. The scandal here is exactly akin to the rating agency role in subprime
securitizations.

There are two kinds of accreditation — national and regional. Accreditation bodies are non-governmental, non-profit peer-reviewing groups. Schools must earn and maintain proper accreditation to remain eligible for Title IV programs. The relationship of the for profit education industry and the national accrediting boards is, in my view, similar to the relationship between the rating agencies and investment banks. There, Wall Street paid the rating agencies handsomely for ratings on subprime securitizations that turned out to be overly optimistic. Here, the industry, we believe, controls the national accrediting bodies by actually sitting on the boards of those very same institutions. The lunatics are running the asylum.

Eisman predicts massive waves of defaults; his estimate is that students will owe some $330 billion in loans and fees on defaulted loans over the next ten years.

The entire testimony is worth reading, and I thank Rick Puig for the pointer.

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2 thoughts on “Steven Eisman testifies about the subprime nature of the for-profit education industry

  1. [...] This post was mentioned on Twitter by eapenthampy, robotsoul. robotsoul said: great blog post from @Eapenthampy comparing for profit education to the subprime market: http://bit.ly/bxICf0 [...]

  2. [...] more, check out the article here. Categories: Government/Industry News Comments (0) Trackbacks (0) Leave a comment [...]

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