Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Feb 14, 2012

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Imagine if we increased the risk associated with student loans. Not for students though. No, their financial future, their credit score, and their education serve as more than enough risk. In fact, the argument may be made that students should be relieved of some risk they assume when talking out education loans.


The group we’re talking about now are the colleges themselves.


Default? What’s that?


Unlike mortgage originators and auto loan originators—who have the potential lose money if they issue a loan worth more than a borrower’s purchase—colleges, who often act as the student loan originators, have no risk at all.


When a mortgage loan is given to a borrower, the lender knows very well that if the borrower defaults, the only way money will be returned is by repossessing the collateral, which is the house, and selling it to another buyer. They act much like a pawn shop owner who gives away money while holding a valuable item hostage. If that valuable item loses its luster or desirability, though, the lender is the one who bites the bullet come the borrower’s default.


Likewise, auto loan originators operate in the same way, but with vehicles. After lending money to a borrower to purchase a new car, if that borrower defaults the lender repossesses the car and hopes to make enough money on its sale to compensate for his loss.


Now let’s keep the theory of those two systems in mind as we approach colleges and their clientele. If students default on their student loans, the college can be assured they will still get their money one way or another. But they don’t take their degree back and resell it at half price. Instead they imprison their borrowers in a non-dischargeable debt that follows the defaulter around like a violent black rain cloud.


In the event students blatantly refuse to repay the student loan, which will result in massive credit hits and subjection to legal trouble for years to come, the taxpayers have their backs.


Regardless of what happens, colleges profit.


Guarantee? No, Haven’t Heard of That Either


Then there’s the issue of the quality and guarantee colleges promise.


More often than not prospective college goers select the institution they’ll attend when they’re in high school and of no more than 18 to 20 years of age. All their life they’re told a college education is necessary for a successful life. And through their entire childhood and teenage years, they’re groomed to take test after test in an attempt to “get ready for college.”


Come November of their junior year in high school they select a college they feel will best propel them into the job force of America with the highest success rate, and usually take little caution over the amount of student loans they’ll need.


But the ugly truth is that kids are sometimes misled.


Recruiters come to their high schools and claim their college’s degrees offer graduates a certain amount of weight in the working world. They usually throw around statistics like the San Francisco-based California Culinary Academy did when it said 97 percent of their college graduates were placed in jobs upon graduating. What the for-profit cooking college failed to disclose was that the 97 percent statistic included “Starbucks baristas, prep cooks, line cooks, and waiters,” as reported by the investigative reporting watchdog


Then again, though, there’s no reason to disclose the truth behind those statistics because colleges don’t need to stand behind their guarantee. They will get their student loan money regardless of the outcome. So $43,000 later, assuming the $10-an-hour line cook doesn’t spend one dime on any other expense, he will pay off his student loans in 180 complete 24-hour days of work—before interest is calculated and compounded.


In the meantime, the California Culinary Academy will be busy recruiting others to join that line cook as future Alumni.


This sort of behavior isn’t exclusive to the often scrutinized for-profit sector of our educational system either. Instead, it’s seen across the board. Take for instance the prestigious law schools strewn about the nation—many of which belong to their resident state, like the University of California (UC) schools.


Back in 1997, U.S. News published a statistic called “graduates known to be employed nine months after graduation” that claimed the average graduate employment rate, as collectively reported by law schools, was 84 percent. A recent release of that statistic revealed an increase of 10 percent, according to a NY Times article.


But here’s the dilemma: according to the same article, over 15,000 attorney and legal-staff jobs at large firms have disappeared.


How can we have a 10 percent increase in employment with 15,000 less jobs? Something’s not adding up—however, the student loan debt continues to.


“Enron-type accounting standards have become the norm,” William Henderson, a law professor at Indiana University who’s trying to persuade the American Bar Association to prohibit such misleading statistics, told the NY Times. “Every time I look at this data, I feel dirty.”


That dirty feeling arises because dirt is exactly what these statistics are riddled with. Like the aforementioned liar-of-a-culinary-school, the nations’ law schools are counting waiters, retail store clerks, and grocery store cart-collectors as “employed.” Their employment numbers don’t refer to those employed in the profession of their degree—they refer to anybody making any amount of money in any job available to them.


Revamp the Student Loan Industry


Plain and simple, the nation’s youth is being preyed upon. Colleges target kids at an age where they have no concept whatsoever about degrees, employment, the value of education, financial systems and credit (something many adults can still attest to having no knowledge about). Then they throw financial cuffs on our kids’ wrists and lock them into a prison of monthly student loan payments for sometimes a 10-, 20- or 30-year sentence.


That’s why the Occupy Wall Street supporters are so mad. Despite the fact that their adolescent efforts to change the system were destined to fall on deaf ears due to their irate, impulsive, and hastily thought out approach, it’s not difficult to see where their gripes with the student loan industry coming from.


What we need is a complete revamp of the industry. Imagine if we instituted a system in which college’s had to work for student loan payments. They could continue to travel the nation recruiting high school students—but if the college’s promises were misrepresented or unfulfilled, they would take the financial hit instead of allowing their victims or tax payers to.


Employment statistics would need to be redone to represent employment in the field which the college was supposed to propel their clientele into (make no mistake; students are clients in this business relationship). If a college promises employment (as so many for-profits do), then they would land students in a qualified job, or offer a refund for the cost of the degree.


When students default due to unemployment, the student loan balance should fall on the college that failed to provide them with an adequate degree, job training, and interview skills.


Finally, if a college experiences a higher-than-expected drop out rate, then they would take a blow in the form of decreased state and national funding. This would increase our colleges’ need to motivate, uplift, and provide students with quality education that would prompt them to continue their pursuit for a degree.


Colleges are meant to be the portals grooming our nations’ youth to one day run this country. If they’re confident in their ability to perform, they shouldn’t fear putting a little skin in the game.