The Consumer Financial Protection Bureau (CFPB) made allegations last week that one of the nation’s largest for-profit colleges, ITT Educational Services, is pushing students into high-cost student loans that are built to fail. This is the CFPB’s first enforcement action against a for-profit college.
The CFPB alleges that ITT, which educates tens of thousands of students in over 40 states, is steering students into high-interest private student loans in order to afford ITT’s expensive price tag. While ITT students use federal student loans to fund the majority of their education, private student loans play an important role in covering the gap between the cost of attendance and federal loans.
ITT offers students a zero-interest loan called “Temporary Credit” to cover the tuition gap for the first year of the student’s program. That loan must be repaid in full by the end of the first year—which many ITT students are not able to do. The CFPB alleges that ITT steered students into repaying the Temporary Credit loans and filling their second-year tuition gap by taking out expensive private student loans without providing the students enough information about the loans’ terms and conditions.
ITT’s CEO even disclosed to investors that it was their “plan all along” to turn the short-term Temporary Credit into long-term loans.
According to the CFPB, ITT signed students up for the loans through an automated process, and some students weren’t even aware they had private student loans. Having those loans could be devastating, given the high cost of the loans. For borrowers with credit scores under 600, the loans included 10 percent origination fees and interest rates up to 16.25 percent. ITT projected that 64 percent of their students would default on these private student loans. Since student loans are nearly impossible to discharge in bankruptcy, defaulting on them can severely damage students’ credit and hamper opportunities to build wealth for years to come.
Woodstock Institute applauds the CFPB for taking action against practices that start students off on their careers with unsustainable debt loads. Schools must make every effort to ensure that students adequately understand all of their options for financing their education, not push them into high-cost loans that lack consumer protections. We also applaud Sen. Dick Durbin (D-IL) for urging the Department of Education to investigate ITT for deceptive and misleading practices.