Financial Advice

The Department of Education Ignores Signs of an Impending Student Loan Meltdown: The Deepwater Horizon Syndrome

Deepwater Horizon, a giant offshore drilling rig in the Gulf of Mexico, blew out on April 20, 2010. Eleven workers died, and more than 200 million gallons of crude oil spewed into the Gulf.

According to the recent film about the blowout, this catastrophe could have been prevented. Instruments on the rig alerted workers that pressure was building around the concrete core and that a blowout was imminent; but supervisors convinced themselves that the instruments were malfunctioning and everything was fine. (John Malkovich, the movie’s villain, plays Don Vidrine, a fiendish British Petroleum technocrat.)

Something similar is happening with the student loan crisis. DOE issued its College Scorecard in 2015, which reported the percentage of students who are in repayment and actually paying down their loans. DOE reported that 61.1 percent of student borrowers had made some progress toward paying down their loan balances 5 years into repayment.

But a coding error led to an erroneous report. As Robert Kelchen, a professor at Seton Hall University explained in a recent blog posting, the picture is much bleaker than DOE portrayed.

Five years into repayment, less than half of student borrowers have made any progress toward paying off their student loans. Among borrowers who attended for-profit colleges, the numbers are even more startling. Five years into repayment only about a third of for-profit students (35 percent) had reduced their loan balances by even one dollar!

People who don’t reduce their loan balances five years after beginning repayment are not likely to pay off their student loans–ever. In fact, the Brookings Institution reported in 2015 that nearly half of for-profit borrowers (47 percent) in a recent cohort had defaulted on their loans within 5 years.

In short, DOE is behaving just like John Malkovich’s character in the movie Deepwater Horizon. The data warn of an impending blowout; but DOE keeps pumping money to the for-profit colleges. A disaster is inevitable; and there are already millions of casualties.

This article by Richard Fossey first appeared on Condemned to Debt and was distributed by the Personal Finance Syndication Network.