Mortgaging Human Capital

By Jean Braucher Roger C. Henderson Professor of Law, the University of Arizona

For more detail on the points discussed below, see the full paper, available for freedownload at http://ssrn.com/abstract=1971735 and published in 69Wash. & Lee L. Rev. 439 (2012).

Student loans figure more and more as a factor in personal over-indebtedness and bankruptcy.  Bankruptcy Jean Braucher pictureunfortunately does not typically provide effective relief specifically for student loans, although some bankruptcy judges have come up with creative ways to make chapter 13work by allowing debtors to keep making full payment on their student loans or by enjoining penalty and late charges during a plan.

The most troubled part of the student loan scene involves debt to attend for-profit colleges and universities.  Former students of “career colleges,” as their trade association dubs them, have the biggest total debts and highest default rates compared to former students at public and non-profit schools.  Career college students alsohave high dropout rates, leaving many with debt but no degree.

Recognizing the deep problems in this sector, the U.S. Department of Education promulgated the new Gainful Employment Rule to target the worst performing for-profit schools, ones whose former students have very low rates of repayment of student loan principal and high debt-to-income ratios.  The rule went into effect July 1, but it won’t have an impact for several years because schools will be given a chance to fix poor performance.  Also, the rule was watered down from what was first proposed, but eventually it will make some for-profit schools ineligible for federal higher education funds, cutting off the spigot at the front end.

More fundamentally, a rethinking is needed concerning how the United Stated can best meet the goal of  returning to having the most highly educated population in the world (in a generation, we dropped from first to twelfth).  Community colleges are the most cost-effective way to provide higher education.  Federal funds might be better used to help them expand, when instead these schools are being forced to cut back in an era of declining local and state support.

The business model of for-profit higher education is built on high use of federal student aid funds, both grants and loans. Tapping this source of revenues, the industry grew dramatically in the first decade of the 21stCentury. In the school year ending in the spring of 2010, 3.3 million undergraduates and 431,000 graduate students attended for-profit schools.  In 2009, for-profit schools served 11% of post-secondary students but received more than double that percentage of federal student aid.  In 2009 alone, $4 billion in federal grant aid and $20 billion in federal student loans went to the for-profits. Some students also took on private student loans to attend these schools.

While some of the career colleges do prepare their students for good jobs, particularly when employers team with the schools and pay for employees to attend (avoiding the debt problem), the dropout and default rates have generally soared as schools aggressively recruited students without the preparation to benefit.In an echo of the subprime mortgage crisis, the schools targeted the poor and minorities, and also former military personnel, populations eligible for maximum grants, with federal student loans on top of that.  The schools get their money up front, leaving the federal government trying to collect.

Debt for higher education looms as the biggest growth area in family budgets.  Rethinking of both the front-end of how education is financed and of relief at the back-end for individuals who do not benefit will be front burner issues in the creditor-debtor world for the foreseeable future.


Jean Braucher is the Roger C. Henderson Professor of Law at the University of Arizona in Tucson, Arizona.  She teaches Bankruptcy, Contracts, and Commercial Law, and her scholarship focuses on consumer aspects of these subjects.  She is the founder and faculty supervisor of The Mortgage Clinic at the University of Arizona law college, a collaboration with Southern Arizona Legal Aid.   She was the Robert Zinman Scholar in Residence at the American Bankruptcy Institute in spring 2011.  She is Distinguished Scholar and Chair of the Contracts Project at the Institute for Legal Studies of the University of Wisconsin Law School and a co-author of Contracts: Law in Action, Volumes I and II (3rd Ed. 2010 and 2011), with Stewart Macaulay, John Kidwell, and William Whitford.  A member of the American Law Institute, she served as an Adviser for ALI’s Principles of the Law of Software Contracts (2010).  She is a member of the board of the National Association of Consumer Bankruptcy Attorneys and vice president of the National Consumer Bankruptcy Rights Center. She is a past chair of three sections of the Association of American Law Schools (Sections on Bankruptcy (twice), Contracts, and Commercial and Related Consumer Law) and a member of the Law and Society Association.  Professor Braucher has been a visiting professor at Boston College School of Law, the University of Texas School of Law, and Cornell Law School.

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