“Attacking the Concept of Debt”: Challenging Predatory Student Loans Runs Up Against a Long History

Since its inception in 2012, [Project on Predatory Student Lending] has helped eliminate hundreds of millions of dollars of student-loan debt. HLS lecturer Toby Merrill, J.D. ’11, founded the project after seeing similarities between predatory-lending practices in subprime mortgages and for-profit colleges. She hoped tactics like those that lawyers used against the subprime mortgage industry—“litigating on behalf of individuals against underlying bad actors”—could be used against for-profit schools. PPSL does individual casework, but also pursues more systemic change: its “mission is to make it so that these schools can’t exist, that they can’t continue to perpetuate these predatory practices on students,” says Victoria Roytenberg, a senior attorney at PPSL. “We do that first and foremost with litigation; we do that in our work with policymakers and elected officials.” 

She recalls, for instance, working in 2017 to assist students in suing ITT Technical Institutes—a behemoth for-profit school that operated 138 campuses across the country and an online program before declaring bankruptcy in 2016. The court filing accused the company of “churning students through a costly sham” in pursuit of earnings rather than education. “Student-loan debts are almost impossible to discharge in bankruptcy,” Roytenberg says. “The cruelty of it is that even these companies, like ITT, get to go bankrupt and there’s no consequences for them. They get to walk away virtually unscathed.” Regulators and for-profit school executives alike tend to place responsibility for debt on the student borrower, rather than on the schools encouraging students to take out risky loans. The case of ITT, however, would be different: the project not only secured a landmark settlement—the cancellation of $500 million worth of debt for 750,000 former ITT students—but flipped the borrower-creditor script, successfully arguing that students were the largest creditors of ITT’s estate and securing them a $1.5 billion allowed claim against ITT’s estate. (The bankruptcy case that will determine the value of that claim is continuing.)

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The for-profit college industry, explains Eileen Connor, PPSL’s legal director, preys on low-income and minority individuals, as well as single parents and veterans, for many of whom higher education seems like a distant dream. It is a relationship ripe for abuse, she says. When meeting with a for-profit college recruiter, few people realize they are dealing with a salesperson working on commission and thus are likely being taken advantage of, “because they’ve been conditioned over their entire lives to think education is something good and public-minded.” Yet for these schools, Toby Merrill adds, education is often not a priority: many for-profit colleges spend far more on marketing and executive compensation than education, use false advertising practices, and are more expensive compared to similar programs at other schools. Although predatory-lending behaviors also exist at public and private nonprofit universities, the HLS project focuses on proprietary colleges as the worst actors in higher education. Students at for-profit colleges are more likely to default on their debt than obtain the credential they sought; for-profit schools enroll 13 percent of the total student population in the United States but account for 33 percent of federal student-loan defaults. “Instead of just celebrating the availability of loans for higher education,” Connor says, “we need to ask: ‘Why are we doing things this way, and who are we really helping?’”

MERRILL TRACES the origins of the predatory student-lending industry to the Servicemen’s Readjustment Act of 1944, or GI Bill, which paid for World War II veterans to attend college or vocational school. The bill created a voucher model for higher-education funding: the federal government distributed money to individuals, rather than to schools. Later, the Higher Education Act of 1965 created the Federal Family Education Loan (FFEL) program, under which the government insured bank-provided loans (rather than government grants under the GI Bill) to students seeking to attend college. The voucher model continues today.

The GI Bill and the first Higher Education Act were designed to provide opportunity to those in need—veterans and the poor. But this flood of money created a system in which students became a means for private actors to receive federal funds. The federal guarantee on bank-issued student loans, combined with the government’s extraordinary debt-collection powers, made these loans virtually risk-free for companies. The for-profit college industry began to proliferate in the 1970s and 1980s. According to PPSL, for-profit colleges receive more than $30 billion annually in federal student aid—in 2010, this amounted to one-quarter of all Department of Education (DOE) student-aid program funds. “The federal student-loan program is itself a motivator for these companies,” Merrill explains, “because it provides potentially unlimited access to federal funds.” 

The Project on Predatory Student Lending considers the federal government, in particular its lending practices and lackluster regulation, just as responsible for predatory student lending as the schools themselves. “This is really a two-party problem, and it always has been in terms of influence and capture,” Connor says—the DOE and for-profit schools form the ends of this two-pronged system. For instance, in 2005 the government lifted a rule that prohibited colleges with more than 50 percent long-distance (i.e. online-only) enrollment from receiving federal funds, leading to tremendous growth in the size and profits of proprietary schools that could now offer mostly online classes. “[The DOE’s] clientele, to the extent that they have one,” Merrill says, “is really schools and not students.”