Dear IRS: Please note that beginning this year, I am no longer earning an income. From now on, I am compensated through what I like to call column interest. It isn't pay. It's a capital gain that I receive in exchange for providing about 2,000 words a week to this newspaper. Please lower my tax rate accordingly.
Hey, you can't blame me for trying. After all, a similar strategy has worked for years for money managers at hedge funds and private equity firms. In fact, now that Congress is threatening to close that loophole, the private equity world has erupted with an anguished wail. Such is the reaction when the privileged few are asked to pay their fair share.
Are we going to do this all over again? -Steven Eisman, Testimony Before the U.S. Senate Committee on Health, Education, Labor and Pensions, June 24th, 2010
Steven Eisman has a J'accuse moment with the for-profit education industry. He's talking about the excesses and misdeeds of the federally backed student loan industry (Title IV loans).
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....
Here is one of the more upsetting statistics. In fiscal 2009, Apollo, the largest company in the industry, grew total revenues by $833 million. Of that amount, $1.1 billion came from Title IV federally-funded student loans and grants. More than 100% of the revenue growth came from the federal government. But of this incremental $1.1 billion in federal loan and grant dollars, the company spent only an incremental $99 million on faculty compensation and instructional costs – that’s 9 cents on every dollar received from the government going towards actual education. The rest went to marketing and paying the executives. One major reason why the industry has taken an ever increasing share of government dollars is that it has turned the typical education model on its head. And here is where the subprime analogy becomes very clear.
There is a traditional relationship between matching means and cost in education. Typically, families of lesser financial means seek lower cost institutions in order to maximize the available Title IV loans and grants – thereby getting the most out of every dollar and minimizing debt burdens. Families with greater financial resources often seek higher cost institutions because they can afford it more easily. The for-profit model seeks to recruit those with the greatest financial need and put them in high cost institutions. This formula maximizes the amount of Title IV loans and grants that these students receive.
With billboards lining the poorest neighborhoods in America and recruiters trolling casinos and homeless shelters (and I mean that literally), the for-profits have become increasingly adept at pitching the dream of a better life and higher earnings to the most vulnerable of society.
He also beats plenty hard on the for-profit education served up after families dive deep into debt.
If the [for-profit education] industry provided the right services, drop out rates and default rates should be low.
Let’s first look at drop out rates. Companies don’t fully disclose graduation rates, but using both DOE data, company-provided information and admittedly some of our own assumptions regarding the level of transfer students, we calculate drop out rates at most for-profit schools are 50%+ per year.
How good could the product be if drop out rates are so stratospheric? These statistics are quite alarming, especially given the enormous amount of debt most for-profit students must borrow to attend school.
But what about default rates? Eisner is convinced the industry manipulates the default rates, but he paints a truly horrifying picture with what information is available.
The federal government is covering defaults for the Title IV loans, so the lender has every incentive to write crap loans. After all, they're not stuck with the bill. This is awful for lots of reasons, but wait! There's more...
The companies who offer Title IV student loans also offer their own private loans as well. The loan loss provision for these loans is 50%-60%. That's money the bank is setting aside to cover defaults. When you're setting aside more than half the the amount you're loaning out to cover defaults - you're expecting a massive default rate. Under 10% is what you're looking for if you're planning on getting money out of your loans.
But why are Title IV lenders reporting that their private loans are tanking so hard?
According to Eisner, this is why:
There are two key statistics. No school can get more than 90% of its revenue from the government and 2 year cohort default rates cannot exceed 25% for 3 consecutive years. Failure to comply with either of these rules and you lose Title IV eligibility. Lose Title IV eligibility and you’re company’s a zero.
With respect to the default statistics, it is my belief that they are manipulated. Since the rule currently revolves around the 2 year default rate, the companies have every incentive to keep that statistic below 25%.
Isn’t it amazing that [leading Title IV lender] Apollo’s percentage of revenue from Title IV is 89% and not over 90%. How lucky can they be? We believe (and many recent lawsuits support) that schools actively manipulate the receipt, disbursement and especially the return of Title IV dollars to their students to remain under the 90/10 threshold. And again, unprofitable private student loans is also a way to keep below the 90/10 threshold.
Incredibly, it gets worse from there. Read Eisman's testimony (PDF)
E keeps telling me I should teach - I'm not sure any school would have me, but I'd certainly admit that I love explaining things.
This is an aspect of myself I have inflicted on family and friends unconsciously for decades. It only since I became a parent that I've understood what a compulsion this is for me. I watch my son explain something to me he's only just learned - from me.
He cannot help himself - because I have the same compulsion. I want to explain it, even if I just found out about it a few seconds ago. Frequently because I just found out about it a few seconds ago.
My pat line is that I'm great at explainings things - I'm but just bad at understanding things.
In my current profession - these traits get me invited to present topics to groups, and subject me to public correction.
In some settings that is a bad thing - but the overall goal is to find stuff out. I love finding things out - and there is nothing special about that quality. A moment of discovery - the instant that you realize you really understand something is a great moment.
I've said a truly sickening number of times that after I read Richard Rhodes book The Making of the Atomic Bomb I felt like I could go out and teach a class about building bombs. That's the mark of quality instruction - you end with concepts and details working together in your head.
A book is not a classroom - and despite the absence of a true instructor, I learned a ton.
What made me think about all this was listening to Salman Khan - someone who clearly enjoys explaining things even more than I do.
Khan runs the Khan Academy - a free library of online courses where he explains pretty much damn near everything.
Here he is talking about how he got started out and what he's learned about learning and teaching.
He describes the moment of discovery as an unbeatable high, you gotta love that.
I admire what he's done. A website that offers opt-in, free instruction where the end user is in total control.
He reads testimonials of people who struggled in regular classrooms, but have excelled under his instruction.
There's no one superior way to learn things - but the emergence of new techniques (or the refinement of existing ones) is just a glorious thing.
