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Utah students who attended for-profit colleges are showing up in growing numbers at the offices of bankruptcy lawyers hoping to find a way out from under student loans that they can't repay.
Verifiable numbers are hard to come by, but a Salt Lake Tribune survey of Utah lawyers suggests that client cases involving student loans have jumped to 15 percent to 30 percent of their caseloads after the recession started four years ago even though student debt rarely can be eliminated through bankruptcy.
"The growth is in the for-profit colleges," said Marji Hanson, a Salt Lake City attorney. Many of her clients are nontraditional students who lost jobs during the recession and enrolled in for-profit institutions hoping to quickly launch new careers. Many either quit before completing their education or, upon graduation, found the job market remained difficult.
The schools "tailor their programs to provide career education [and] job skills. But if there are no jobs on the other end, then [the students] just have a loan that is non-dischargeable" in bankruptcy, Hanson said.
For-profit schools are the clear beneficiaries of two economic recessions during the 2000s and the current poky recovery. The number of students enrolled at for-profit colleges in the U.S. jumped to 9 percent of all college enrollments in 2009 from 3 percent in 2000, says the National Center for Education Statistics (NCES).
"Private for-profit institutions have become an increasingly visible part of the U.S. higher education sector. They are today the most diverse by program and size, have been the fastest growing, have the highest fraction of nontraditional students, and obtain the greatest proportion of their total revenue from federal ... loan and grant programs," three Harvard professors wrote in a paper published by the National Bureau of Economic Research (NBER) last year.
Rapid growth • The growth hasn't backed off. Nationally, from 2007 to 2008, enrollments at for-profit colleges jumped 24 percent and now stand close to 1.5 million students, according to the NCES. (A higher estimate published by the NBER put the figure at 1.85 million.)
In Utah, the increase was more modest 5.6 percent, which brought the number of students enrolled at for-profits to 9,001 in 2008. Although the velocity lagged behind the U.S. rate, it was close to the 6.7 percent gain at Utah's not-for-profit colleges and universities. Slightly more than 4 percent of Utah college students attended a for-profit in 2008, according to the federal data.
Many students who attend for-profit colleges are older. The NCES says 30 percent of full-time students were at least 35 years old in 2009. Nearly all borrowed money to finance their educations. Ninety-two percent took out loans during the 2007-08 school year, according to the Institute for College Access and Success, a nonprofit research group.
Upon leaving school, many were saddled with big debts. In 2009, tuition and fees at for-profit colleges averaged $15,300. By contrast, the average for public institutions was $6,400, according to the NCES. Within three years of leaving, the default rate on loans made to for-profit students was 25 percent, nearly double the national average of all college students.
Brian Moran, executive vice president of government relations at the Association of Private Sector Colleges and Universities, said his organization urges for-profit institutions to counsel students on borrowing and how to manage debt as soon as they are accepted into a program. The association pushes the schools to provide information about how much to borrow, payments and the reality that loans are not dischargeable in bankruptcy, he said.
Moran attributes higher default rates and higher tuitions at for-profit schools to a mix of factors. Tuitions are more expensive than public institutions because student demand is high and for-profits don't receive tax subsidies to underwrite expenses. What's more, students enrolled at for-profits "do not have inherited wealth or parental support. They are typically working or the first in their families to go to school. So they have a number of disadvantages that your more-traditional student who enjoys parental support possesses," he said.
"They do incur debt and struggle as a result of that debt," Moran said.
Priority debt • Many of David Berry's clients are coming to his Salt Lake City law office with unmanageable debts they incurred at a for-profit college or trade school. In the past, the amounts were small and were usually a negligible element as they weighed whether to file for bankruptcy protection. That's changed.
"The amount is going up because I'm beginning to see people that during the recession went back to school and came out either unable to find a job or they can't find a job that pays enough to support their families and [also] pay the debt service on their student loans," Berry said.
The law is clear. Student loans, like back taxes and child-support payments, are considered to be priority debt. They must be paid in full. Before 2005, student loans could be eliminated in bankruptcy if they were made by a private lender. But with passage that year of the Bankruptcy Abuse Prevention and Consumer Act, privately funded loans are now treated the same as loans guaranteed by the federal government. The only way to be relieved of liability is to show undue hardship, which lawyers say isn't easy.
Otherwise, delinquent private loans are turned over to collection agencies whose "aggressive" tactics often "drive people into bankruptcy because they don't feel like they have any other choice," Berry said. Or if the loan is federally guaranteed, the government will garnish up to 25 percent of the debtor's take-home pay.
"When they do that, they do it with a vengeance," he said.
Legal options • Although student debt usually can't be wiped out through bankruptcy, it is possible to use the court to buy more time to repay loans, said Jeff Butler, a Salt Lake City attorney. Some of his clients will seek to reorganize their debts under Chapter 13 of the U.S. Bankruptcy Code.
"In a Chapter 13, you propose a plan to repay your creditors over time. The advantage is it gives you breathing room. You aren't required to pay as much as [creditors] are asking for," Butler said, adding that the borrower, not the creditor, determines the amount of the student loan payment, which he notes could be zero.
Chapter 13 plans are usually in force for three to five years. During that time, the borrower is also repaying other debts whose remaining balances, unlike the student debt balance, will be discharged at the end of the plan. At that time, the borrower can add those payments to his or her student loan payments, Salt Lake City lawyer John Evans said.
"If they take the money they were paying [to other creditors], that's usually enough to make a dent in their student loans," Evans said.
Berry is less sanguine. He tells his clients that they may owe more on their student loans at the end of a Chapter 13 plan if they use it to pay little or nothing.
While they may get a few years of breathing room, interest on the unpaid balance continues to accumulate, he said.
"I advise them that [they] are going to owe more on the loan, maybe twice as much as when they started. The majority of Chapter 13s don't pay anything" on their student loans during the plan, Berry said.
He said the only other bankruptcy option is a Chapter 7 petition. It will get rid of all dischargeable debts such as credit cards, ostensibly leaving the borrower enough income to pay off his student loans.
Sometimes, he added, "we don't have solutions for them."
By the numbers • The cost of a degree
Students nationally attended for-profit colleges in 2008 36 percent were males; 64 percent were females
Students were enrolled in for-profit colleges in Utah 47 percent were males; 53 percent were females
Total of average fees and tuition at for-profit colleges in 2008-09 nationally. At public colleges and universities they were $6,400. At private not-for-profit institutions they were $24,900.
Students obligated to begin repaying student loans in 2007 who had defaulted by 2010. Nearly half (48 percent) attended for-profit colleges.
Sources: National Center on Education Statistics; Institute for College Access and Success