By Student Borrower Protection Center – Published June 2021 by Student Borrower Protection Center – Subscribe to the WFMonitor eNewsletter
In this report, the Student Borrower Protection Center (SBPC) investigates the marketplace for “shadow student debt,” with a focus on public college and Online Program Management (OPM) partnerships and nondegree technical course offerings. Shadow student debt is described by SBPC as “an umbrella term for the broad set of risky loans and credit available outside of the traditional private loan market” used to finance college attendance and supplies. Among the over $1.7 trillion dollars of student loan debt in the U.S., SBPC has documented billions of dollars in dangerous, risky, and illegal debt perpetuated through revenue sharing agreements between (private and public) colleges and Online Program Managers (OPMs).
Editor’s Note: This SBPC report featured a significantly large amount of important data points and examples of predatory lending practices from a wide variety of sources. We summarized some but not all of the most salient aspects of the report to give readers a sense for what looks like a serious problem that is undermining the notion of public education as a public good.
Background: Private Student Loan and Shadow Debt Parallels
Private student loans, unlike direct loans that originate from the Department of Education, are loans mainly made by “large banks, credit unions, and other companies offering specialty credit used to finance postsecondary education.” Private student loans make up an approximately $140 billion dollar market and are “usually used as a supplement to federal student aid, and have grown rapidly in tandem with federal student loans.” The amount of outstanding student debt from private student loans is “now larger than the payday loan market and the total balance of past-due medical debt in the U.S.” Further, over the past decade, borrower debt has increased by 71%.
In the 1980s, scandals revealed that for-profit colleges “relied on high-pressure sales tactics to meet enrollment goals, often leading ‘admissions counselors’ to target vulnerable and unprepared students for degrees they would be unlikely to finish or benefit from.” Such malpractice prompted the federal government to regulate postsecondary schools’ funding sources. For example, congress enacted an “incentive compensation ban,” blocking funding from schools that “pay employees based on the number of students they recruit or receive a share of the federal student aid dollars generated by the students they help enroll.” Today however, “safe harbors” and loopholes exist for schools to compensate employees based on enrollment numbers. For more information on federal legislation and executive policy related to the regulation of for-profit school funding mechanisms, see a 2018 Century Foundation report.
Within the postsecondary education loan market, away from brand-name private loan firms, exists personal loans, lines of open-ended revolving credit, income share agreements, unpaid balances owed directly to schools, certain private student loans, and other forms of debt and credit. These “expensive, misleading marketed, and lightly underwritten” predatory credit products make up what SBPC refers to as the “shadow student debt” market. Shadow student debt involves extremely high interest rates and fees, reckless underwriting, and aggressive debt collection methods. Previous SBPC investigations into this market have “revealed abuses ranging from small startups misrepresenting the costs of their loans to large corporations extending revolving credit at double-digit interest rates for dubious non-accredited programs.” Furthermore, SBPC notes the market’s history of disregard to state law and scandals at for-profit colleges. Of late, similar misconduct has increasingly spread to public colleges and universities through OPM and shadow lender partnerships.
Through marketing and facilitation of shadow lender firms’ products, “with OPMs acting as substantial intermediaries to assist with the advertising and orchestration of student financing,” many public institutions are participating in unethical and illegal business relationships similar to “behavior that grew out of back-room deals that have previously led to scandals in the student loan market.” Yet, federal legislation and policy increasing disclosure and transparency requirements passed in response to this behavior has largely been ignored by schools, OPMs, and lenders. Moreover, revenue share and other contractual agreements between colleges and OPMs, “blur the lines between lender, school, and service provider.” Specifically, several public institutions highlighted by SBPC are guiding students to shadow loan products to finance non-degree, unaccredited programs. For example, through deceptive use of branding and explicit recommendations of shadow lenders’ products on schools’ web domains, students are prompted to opt into dangerous and risky loan agreements.
OPM Contracts and Dollars
According to 2020 estimates from HolonIQ, universities and colleges pay OPMs as much as $4 billion dollars per year and are predicted to spend $10 billion dollars annually to these companies by 2025. Several of the largest OPM firms are publicly traded corporations and have recently spent millions of dollars acquiring non-degree granting technical boot-camps. For example, the OPM 2U spent $750 million dollars acquiring the technology education company Trilogy Education to expand boot-camp programs. Other OPM corporations such as Zovio Education, Promineo Tech, and Software Guild have significant investment in online course offerings.
“The specific services that OPMs provide at a given school vary on a contractual basis across institutions, with OPMs in some instances simply providing a platform for school-provided teaching and in other cases OPMs developing, recruiting for, and conducting job placement services for a given course of study.” Partnerships between public institutions and OPMs are lucrative for both parties, with proceeds from the credit students take on and OPMs taking up to “80 percent of the tuition dollars associated with the courses they help schools introduce through so-called ‘revenue sharing’ arrangements.”
Scholars and consumer advocates have lamented the quality of OPM course offerings. In addition, the Century Foundation found that “many programs offered at brand-name universities through OPMs expose students to the same risks involved with enrolling in a for-profit college, but with even less protection than those students receive, and that these programs suffer from a lack of transparency afforded students and the public.” Further, “the researchers warned of instances particularly involving public colleges where students were left with astronomical debts for low-quality programs.”
According to SBPC, “the growth of the OPM sector depends in part on 2011 guidance from the Department of Education creating a loophole that exempts OPMs from certain rules meant to prevent schools from incentivizing their employees and agents to maximize class enrollment in ways that can be dangerous for students.” Additionally, a 2011 “Dear Colleague” letter from the Education Department exempted OPMs from the incentive compensation ban if they provided “bundled services” at a given school. For example, “OPMs could take a cut of the revenue they generate if they offer services such as marketing, program application assistance, or course support in addition to recruitment.”
Findings and Recommendations
SBPC observed school marketing efforts leading students to agreements with predatory lenders and expensive debt “frequently involved substantial assistance from OPMs such as 2U and Zovio.” Also, they noted “schools, lenders, and OPMs are failing to make key required disclosures related to the nature of their partnerships and students’ financing options, leaving borrowers in the dark with regard to the cost of the loans they are taking on and the alternatives they may have available.”
Specifically, SBPC found:
- Public schools are pushing students toward shadow student debt—all while blurring the line between lender, school, and service provider.
- The shadow student debts that public schools are driving students toward are extremely expensive and risky.
- Public schools and OPMs appear to have preferred lender arrangements with companies offering shadow student debt but are failing to meet key transparency requirements related to these partnerships and students’ financing options.
- The shadow student debt companies that public schools are driving students toward have dubious track records.
- OPMs provide key financial services to schools—and substantial value for creditors—with regard to the execution of student financing.
Editor’s Note: We recommend viewing more detailed examples of all related findings.
- The CFPB (Consumer Financial Protection Bureau) must carefully scrutinize practices by OPMs that drive students toward shadow student debt.
- The Department of Education must enforce requirements around preferred lender arrangement and hold schools accountable.
- States must enact comprehensive registration laws to drive transparency and accountability for student financing companies.
The report concluded with the following statement: “It is time for the Department of Education to follow through on its obligations to protect students from risky lending, for legislators including the CFPB to take on dangerous practices, and for public universities to be held accountable for driving students toward potentially predatory debt.”
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