Thursday, February 07, 2013

Top Schools Suing Grad Students Who Default on Perkins Loans

The Russians report the story this way:

Graduate student borrowers are defaulting on almost US$1 billion in federal loans that were given out to the poor. US colleges such as Yale, Penn State and George Washington are coming after them in the courts, suing for nonpayment.

-from "Wealthiest US Colleges Suing Students over Default loans" from the RT website.

Bloomberg reports it this way:

Needy U.S. borrowers are defaulting on almost $1 billion in federal student loans earmarked for the poor, leaving schools such as Yale University and the University of Pennsylvania with little choice except to sue their graduates.

From "Yale Suing Former Students Shows Crisis in Loans to Poor" from the Bloomberg News Website.

The government is holding the schools accountable that admitted the subject students in the first place. Those subsidies increased the demand for the grad school's education.  Increased demand meant higher fees and expenses could be charged by the schools, which meant the students needed to borrow further, a malignant cycle, no?  Now the schools sue the former students.  We trust that prospective students are much more wary.

I have to question Bloomberg's assertion that the schools have "little choice except to sue their graduates," especially the top ones, with huge endowments, vast fixed assets, and prosperous alumni.  They could start paying the government back right now and not wait on how their lawsuits turn out.  But perhaps they are.

Surely some of the grad students, especially the ones who can't find jobs, will countersue the schools, alleging misrepresentation about the status of the jobs market and a failure on the part of the school to determine whether the student would be able to pay back the school before admitting the student in the first place.

I would be interested in how many suits the government has against the schools.  Probably none at this point.  It ought to happen.

In any event, this probably indicates that government subsidies of higher education generally are at serious risk. In fact, the articles state that this is the case. The higher-education bubble that Glenn Reynolds describes continues its slow motion burst.  It would seem to me the entire business model of the university is experiencing a "creative destruction" wave of the sort that other business and social sectors have experienced.  It's time.

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