If you want to know the dangers of taking out private student loans, just ask the 2,500 students who were, until early this year, enrolled at flight academies across the country owned by Silver State Helicopters.
As recounted by The San Diego Union-Tribune, these students were "left in the lurch" when the Nevada-based company, without warning, shut its doors on Super Bowl Sunday and filed for bankruptcy liquidation. Because the schools did not have the proper accreditation to qualify to participate in the federal student aid programs, the company directed students to take out high-cost private student loans to cover the $70,000 tuition that they were required to pay up front. Unfortunately, these students may be stuck repaying these loans for training they did not ultimately receive.
At Higher Ed Watch, we have often warned of the hazards of private loans, particularly for students attending questionable for-profit trade schools. Private loans almost always have worse terms than federal loans, and lack important safeguards. Unlike federal loans, for example, private loans are not automatically discharged if a borrower attends a school that unexpectedly shuts down before a student completes his or her studies.
To make matters worse, the federal government has made it extremely difficult for borrowers in financial distress to discharge private loans in bankruptcy. While the law does allow discharge for borrowers who can prove that repaying the loans would cause "undue financial hardship," courts have applied the undue hardship standard unevenly, leaving many desperate private loan borrowers with no way out.
All of which is to say that while the unscrupulous owners of Silver State Helicopters can liquidate their company and escape their debts through bankruptcy, flight-academy students like Hector Leon, a divorced father of two who first enrolled in the school in 2006, have no such recourse.
Like many such students, Leon was taken in by the dreams the school was selling. "When I heard their ads, which said you could make upwards of $150,000 to $180,000 a year, I thought it was the way to get a better income and provide a better life for my two kids," Leon told the Union-Tribune.
Sadly, Leon's story, and that of his classmates, is all too familiar.
In the late 1980's and the early 1990's, the U.S. Education Department and Congress were forced to take emergency actions to crack down on an explosion of fly-by-night trade schools set up solely for the purpose of reaping profits from the federal student aid programs. As a result of the crack down, hundreds, and even thousands, of disreputable proprietary institutions were forced to close or were shut down.
Since that time, advocates for trade schools have lobbied aggressively to get federal policy makers to relax these rules, arguing that the problems of the past are entirely behind them. But over the last several years, some of the largest publicly-traded for-profit higher education companies -- such as the University of Phoenix, Career Education Corporation, and Corinthian Colleges -- have come under intense scrutiny from federal and state regulators and have faced numerous lawsuits over allegations that they have engaged in aggressive and misleading recruiting and admissions tactics to inflate their enrollment numbers, while providing academic offerings of dubious value.
And in recent years, there has been a proliferation of unlicensed and unaccredited (or at least not accredited by groups recognized by the U.S. Education Secretary) trade schools, like the Silver State Helicopters Flight Academy, that do not participate in the federal student aid programs and therefore go largely unregulated. The growth of these schools appears to have been fueled by student loan companies that have willingly and irresponsibly "partnered" with the institutions to provide high-cost private loans to the at-risk students these schools tend to attract.
If Congress doesn't overreach in lubricating student loan liquidity, one of the credit crunch's potential silver linings is that it may discourage lenders from participating in deals with the likes of $70,000 a year, unaccredited helicopter training schools. That would benefit both students and the public.