Enrollment, lending up at private colleges

Some of the nation's biggest for-profit colleges and vocational schools are boosting enrollment in tough times by making more loans directly to cash-strapped students, knowing full well that many of them probably won't be able to repay what they borrowed.

The schools still make money because the practice boosts their enrollment and brings in tuition dollars subsidized by the government.

But some of these students could end up saddled with high interest rates and loan payments they can't handle, a burden that could damage their credit for years to come.

Among the for-profit colleges that are booming are ITT, Corinthian Colleges and Career Education Corp. They and other such institutions have an estimated 1.2 million U.S. students pursuing degrees in such fields as nursing, computers and the culinary arts.

Many students at these schools get thousands of dollars in tuition grants under various government programs, and they take out loans to cover the rest of their costs.

But because the economic meltdown has made it harder for students to get bank loans, several of these schools are increasingly stepping in, financing degrees in the same way a furniture store or used-car dealer might extend credit to customers.

These schools call the practice a lifeline for students who couldn't otherwise afford an education. And in some cases, students may find better terms than they used to get from lenders like Sallie Mae Corp., which recently have cut way back on student loans to high-risk borrowers.

But some experts worry students will get pushed into loans they shouldn't take.

In fact, two publicly owned college chains have set aside about half their internal lending amount as a loss reserve -- essentially telling investors they don't expect students to repay more than half of what they borrow.

Another concern: Some companies label such loans consumer financing rather than student loans, which carry particular disclosure requirements.

One for-profit school, Colorado-based Westwood College, has been hit with a class-action lawsuit accusing it of fraud and arguing that its lending program violates state banking laws. Westwood charges a relatively high 18 percent interest but doesn't call its lending student loans.

"It's very alarming," said Deanne Loonin, director of the National Consumer Law Center's student loan borrower assistance project.

Westwood, which has been making such loans for eight years, calls the lawsuit unfounded.

Many for-profits are seeing enrollment surge.

New enrollments at ITT are up one-third from a year ago; last month the company forecast profits 50 percent higher than last year. Laid-off workers returning to school and increased government aid have boosted the number of students at many of these places.

But these for-profit schools also can be expensive.

About 43 percent of college students attending for-profit colleges took out private loans in 2007-08, up from 15 percent in 2003-04, according to an analysis of federal data by the group Education Sector.

During the same period, the proportion of students at for-profit colleges borrowing at least $40,000 nearly tripled to 30 percent, according to the Web site FinAid.org.

Those figures are worrisome because, on average, for-profit colleges have lower graduation rates and higher loan-default rates than other schools.

Some companies, including Apollo Group, parent company of the giant University of Phoenix, have steered clear of such loans altogether. The industry calls internal lending a relatively small practice.

"We're not lenders. We're educators," said Harris Miller, president and CEO of the Career College Association, which represents the industry. But "if it's a question of not going to school at all or covering the gap, they cover the gap."