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Kashia Campbell earned top grades from her patient care technician program at Florida Career College. So she was shocked to find that, upon graduation, she was blocked from the exam to get certified in the field.

The problem was a $6,500 loan she had taken out directly from the college to help her cover tuition. Florida Career College demanded that she pay more of her loan before they would release her transcript, something she said she had not been told previously. The transcript was a prerequisite for the certification exam, and without it she ended up in a lower-paying job earning $10 an hour. Four years later, she can pay only $50 a month on her school loan.

Campbell’s loan is a tiny fraction of the more than $30 million owed to Florida Career College’s parent company, the International Education Corporation. The company doesn’t care whether she and thousands of others ever pay it back. Its main reason for offering loans to people like her is so the company can continue to operate its much more lucrative business model — reaping revenue from federal student aid. Loans like hers count toward the 10 percent of a for-profit college’s revenue that, by law, must come from sources other than federal financial aid.

“The high default rates and low repayment rates — they factor that in as the cost of doing business and the students are the ones who lose out.” 

Ashley Harrington, federal advocacy director, Center for Responsible Lending

These direct school-to-student loans have ensnared hundreds of thousands of students at for-profit colleges. When students borrow directly from a college, they aren’t protected by the same government safeguards they would have if they took out federal loans. The colleges can demand payments while students are still in school. They can withhold transcripts for nonpayment. They can impose onerous interest rates, reaching into the double digits.

Many students are unable to make their monthly payments, leaving their credit ruined and their financial and professional futures in grave doubt.

“The high default rates and low repayment rates — they factor that in as the cost of doing business, and the students are the ones who lose out,” said Ashley Harrington, federal advocacy director for the Center for Responsible Lending. “We’re particularly worried that we’ll see more of this as the economy gets worse.”

Hidden Debt Trap

There’s a whole world of student debt that no one is talking about. In fact, most people don’t even realize it exists. Millions of students have racked up billions of dollars in debt owed directly to their own colleges and universities. 

We’re investigating this hidden debt.

Related: Will colleges with sky-high default rates face consequences?

Loans by educational institutions first became popular during the Great Recession, when third-party lenders stopped or curtailed their private student loan offerings following poor returns on investment. Since then, without government oversight, the practice has spread, and for-profit colleges and universities have lent at least $4 billion, and potentially much more.

A few of the largest programs, such as those run by Corinthian Colleges and ITT Technical Institutes, have shuttered along with their schools, but many more have quietly thrived without oversight. There are now dozens of companies and colleges, which enroll tens of thousands of students, that offer direct student loans, according to federal audits, Securities and Exchange Commission filings and a review of college marketing materials.

The International Education Corporation, the company that operates Campbell’s college and 29 other campuses, was owed $33 million in loan payments in 2018, according to an independent audit submitted to the federal Department of Education. (The department requires for-profit colleges to provide these audits annually.) The company estimated that $13 million of that — or 40 percent — would never be repaid. From the early days of the loan program, which began in 2011, executives knew full well this was a likely outcome. 

For-profit colleges that offer institutional loans often budget for students to be unable to repay them. Universal Technical Institute, for instance, wrote off $2.29 for every dollar that it recouped in 2017. Credit: Independent audit submitted to the federal Department of Education

In 2012, the company acknowledged that collecting all their money would be unlikely “due to the nature of the programs and credit quality of the students,” according to another independent audit. Most former students earn no more than $25,000 annually. In 2018, the International Education Corporation brought in $9.7 million by selling unpaid loans to a debt collector.

When Campbell, now 49, signed her enrollment paperwork, she assumed she’d quickly get a job after graduation and have no problem paying back her loans. Instead, she said, she’s now worse off. After she graduated from Florida Career College in 2016, she said she pleaded with the campus director and bursar’s office to release her transcript but was told no. She called the parent company, the International Education Corporation, but got the same answer.

“I was crying like crazy,” she said. “I don’t understand it. You’re not letting me go out and get a good-paying job so I can pay you back.”

Related: Could the online, for-profit college industry be ‘a winner in this crisis’?

Joseph Cockrell, a spokesperson for the International Education Corporation, said that while he could not comment on individual students’ financial accounts, “students must be current with their loan payments for transcript requests.” He did not respond to follow-up questions about how much a student needs to pay to be considered “current” on loan payments.

Whatever money such companies are able to recoup from institutional loans matters less than the fact that the loans themselves help keep the colleges eligible to collect billions of dollars in federal financial aid. Under federal law, for-profit schools are allowed to derive only 90 percent of their revenue from federal student aid.

The remaining 10 percent must come from elsewhere, including students’ repayments on their private loans. Even if a student pays back only a fraction of the money owed to a school, it helps the institution keep the correct ratio and continue to receive federal financial aid. For example, if a student’s federal aid totals $9,000 and the college loans the student $1,000, the college still nets $8,000 of federal money, whether the student repays the loan or not.

“In the case of these loans, it’s a pretty sure bet,” said Yan Cao, a fellow at The Century Foundation, a progressive think tank, which obtained several company audits through a public records request and shared them with The New York Times and The Hechinger Report. The federal money “goes straight into the school’s hands.”

Lincoln Educational Services Corporation offers institutional loans with a 7 percent interest rate. The company has explained to investors several times how its loan program helps them comply with federal regulations. Credit: Sarah Butrymowicz/The Hechinger Report

Lincoln Educational Services Corporation, another company that runs for-profit colleges, has described in its quarterly reports how it increased its direct lending in order to help it meet the 90/10 requirement. In 2012, the company explained that it had increased the gap between tuition and what federal financial aid covers and, in turn, provided loans to students to help them fill that gap. Over the first nine months in 2012, its lending had grown more than $7 million, to $33.7 million from $26.4 million.

That year, when Jodi-Ann Clarke enrolled in the licensed practical nursing program at Lincoln Technical Institute’s campus (since closed) in Hamden, Conn., the full cost of attendance came to $32,189. That was far more than what federal aid would cover or than she could afford out of pocket.

Clarke recalls college employees giving her instructions on how to take out a loan directly from the school during the enrollment process, which experts say is a benefit of having an in-house lending system. Colleges can use their loan programs as a way to expedite enrollments, sometimes encouraging students to sign up for loans without realizing what they are taking on.

Related: ‘They just saw me as a dollar sign’: How some certificate schools profit from vulnerable students

“It’s really helpful to think about this as an important part of the marketing process as much as it is a student loan,” said Mike Pierce, policy director and managing counsel at the Student Borrower Protection Center, a nonprofit advocacy group focused on student debt.

Unlike Clarke’s federal loans, which only started accruing interest after she left school, payments on her Lincoln Tech loan began when her classes did. The loans also began accruing interest while she was still in school. Lincoln Tech’s administrators projected an attitude of “we’re going to get our money and we’re going to put them in debt and they’re going to have to pay us back,” Clarke said. “I just feel like they’re a money pit.”

Universal Technical Institute, which operates a chain of for-profit colleges, tells investors that changes to laws or policies could cause them to suspend their institutional loan program. Credit: Google Maps

Peter Tahinos, senior vice president of marketing for Lincoln Educational Services, said in an email that he could not comment on individual students but added that employees “provide guidance on the best options for them to finance their education.” Lincoln charges 7 percent interest on its loans. Students can choose to begin payments immediately, with interest accruing right away, or after leaving school, deferring interest until then.

Some colleges increase the burden by imposing high interest rates. Unlike federal student loans, which currently have interest rates of 2.75 percent for undergraduate borrowers, institutional loans can far exceed that. A 2020 report by the Student Borrower Protection Center that investigated private education loans uncovered interest rates as high as 19 percent for loans offered by some schools, including one college with a program that also charged a monthly$10 processing fee.

Related: The Fate Of Florida’s Bright Futures, For-Profit Colleges, And Ransomware Attack On Schools

Scrutiny of this practice remains low at both the state and federal levels. A Hechinger Report survey of 75 agencies across all 50 states — including higher education oversight agencies, attorneys general and departments of finance or banking — found that few places tracked any information about institutional loans. In fact, in the vast majority of states, higher education authorizers don’t require colleges to report plans for such programs.

International Education Corporation was owed $33 million in loan payments in 2018, according to an independent audit submitted to the federal Department of Education, and estimated that $13 million of that — or 40 percent — would never be repaid.

Several state officials said that colleges would be subject to applicable state laws and could be investigated if abuses were reported, but otherwise they had no oversight of institutional loans.

Since its creation in 2011, the Consumer Financial Protection Bureau has taken action against just three for-profit education companies, accusing them of predatory or deceitful loan practices, and announced one additional investigation.

“The bureau has really strong tools to protect student loans made by nonbanks,” said Seth Frotman, executive director of the Student Borrower Protection Center and former student loan ombudsman for the Consumer Financial Protection Bureau. In 2018, he resigned in protest over how the agency was handled under the Trump administration. It is “critically important,” he said, for the bureau under the Biden administration to investigate this sector.

A spokesman for the federal Department of Education said that institutional loans fell outside the department’s purview.

Related: ‘Stuck in it until I die’: Parents get buried by college debt too

Increased monitoring of the sector could change the way for-profit colleges operate their loan programs. Indeed, Universal Technical Institute, a publicly held chain of 12 campuses across eight states, told its investors in its 2020 annual report that “changes in laws or public policy could negatively impact the viability of our proprietary loan program and cause us to delay or suspend the program.”

“If they create a loan for $1,000, the student signs up, and then the school gets the student’s federal grant for $9,000, and that goes straight into the school’s hands.” 

Yan Cao, fellow at The Century Foundation

Jody Kent, vice president for communications and public affairs at Universal Technical Institute, said in an emailed statement that the company’s loan program gave “students access to high-quality education” and was subject to state and federal regulation.

As of September 2017, Universal Technical Institute’s loan program had doled out more than $150 million to students, according to an audit submitted to the Department of Education. Like International Education Corporation, though, the company planned on a significant number of students struggling to repay. In 2017, for instance, the company collected $8 million in loan repayments and wrote off $18.3 million. In other words, Universal Technical Institute wrote off $2.29 for every dollar that was recouped.

Kashia Campbell has been unemployed for the past year and doesn’t think she’ll ever be able to find a well-paying job in health care. She worked in financial auditing before going to Florida Career College and is sending out resumes to companies to see if she can find a way back into that industry.

“I wish I could go back in time,” she said. “I never would have signed up.”

This story about institutional loans was produced by The Hechinger Report, a nonprofit, independent news organization focused on inequality and innovation in education. Sign up for our higher education newsletter.

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Sarah Butrymowicz is senior editor for investigations. For her first four years at The Hechinger Report, she was a staff writer, covering k-12 education, traveling the country and developing an affinity...

Meredith Kolodner is a senior investigative reporter. She previously covered schools for the New York Daily News and was an editor at InsideSchools.org and for The Investigative Fund at the Nation Institute....

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