One Failed College, Two Big Lessons

Screen-Shot-2014-06-02-at-4.54.06-PMI’ve always been fascinated by daytime television. It’s not the soap operas and Judge Whomever shows that captivate me, it’s the ads. To judge by what people are selling, there are millions of consumers at home all day who were hurt in auto accidents or have outstanding liens from the IRS. If only they can connect with the right lawyer or accounting firm, their lives will instantly change for the better!

In addition to this forlorn group, there are many others who, with the right training and certification, could transform their lives through higher earning potential and job satisfaction. Think of the vast, untapped productivity sitting on couches across America right now!

Unfortunately for the second group, their access to the good life just narrowed. The U.S. government killed off ITT Technical Institute, a for-profit college that was a staple of daytime television advertising.

Their demise is an example of a government program run amok and how, eventually, all misallocations of capital eventually fail.

I was never a fan of ITT. I don’t know much about the organization, but any learning institute that has to advertise seemed sketchy to me. Apparently several people at the Department of Education (DOE) got the same feeling. They’ve been on a witch hunt over the past two years, targeting for-profit colleges that receive the bulk of student tuition through federal student loans and have low graduation rates as well as high default rates.

ITT fits the bill… but it’s not alone.

The institute graduates a mere 19% of students, while 34% default on their loans after three years. However, Pueblo, CO Community College graduates only 18% and carries a 30% default rate. Louisiana State University at Alexandria confers degrees on 10% of its students while 17% don’t pay their loans. And closer to home for the DOE, only 12% of the students at the University of the District of Columbia graduate, but 14% default.

The numbers are similar, but apparently they don’t annoy the DOE like ITT and other for-profit colleges. Maybe it’s because ITT CEO Modany earned roughly $3 million last year. But then again, a professor at Columbia earned more than $4 million, and college football coaches regularly pull in more than $1 million. Instructors at ITT earn about $60,000, which is significantly less than tenured professors.

Whatever the reason, the DOE started questioning business practices at ITT and demanded a surety bond of $90 million in case the company went under and left student borrowers with federal loans high and dry. Then the DOE cut off all new federal student loans for ITT, and upped the surety bond to $230 million. The company earned less and had to pay more, so it died, which is apparently what the DOE wanted in the first place.

Keep in mind there’s been no trial, no finding of fault, just a concerted effort on the part of a government agency that wielded a mighty stick because of one thing – debt. Or, more specifically, government-sponsored debt.

If students at ITT didn’t have government-backed student loans, then the DOE would have to slay the company the old fashioned way, in court, proving its claims. But because the department controls the flow of funds, it wields incredible power over the institution, and just about every other institute of higher education in America.

The outcome should be sobering for everyone. I’m still not a fan of ITT, and maybe they did engage in deceptive practices and other nefarious activities as the DOE claims. But the government shouldn’t be able to pick winners and losers. It’s supposed to be a republic, where the laws apply equally to everyone.

This same fight is coming to every state in the nation, but it won’t be over private education. It will be about healthcare.

Through Medicaid and now Affordable Care Act subsidies, the government sends many billions of dollars to states that run their own programs. Costs are skyrocketing and care is getting harder to find. Eventually consumers will revolt, and the government will search for bad actors. They will find them, tucked among those states that had the audacity to run their own programs but also accepted federal funds. By taking the cash, whether they want to or not, they hand over some level of control.

In education, as will eventually occur in healthcare, it’s hard to see how any of this would have come up if costs and borrowing had grown at modest rates. This highlights the other big lesson from the ITT implosion – bubbles burst. And when they do, a lot of people get hurt.

This is analogous to the old quote from economist Herbert Stein, “If something cannot go on forever, it will stop,” which applies to many things in the financial world right now.

We have stock market records with exceptionally low growth. Students have borrowed over $1 trillion and the default rate is over 11% (I think it is much higher). Central banks are printing money and buying debt, forcing interest rates below zero in much of the world. Health insurance premiums are ratcheting up by double digits. Home prices are well above rates that are affordable given current levels of income.

All of these are situations that can’t go on forever… so they will stop. When they do, many will be financially hurt, but others will be waiting to pick up the fallen assets – bonds, stocks, homes, etc. – at bargain basement prices.

The key is knowing how to spot the bubble that’s about to pop, which is the subject of Harry Dent’s new book, The Sale of a Lifetime. Somewhere, investors are ready to pounce on the assets of ITT as it goes through liquidation in the weeks and months ahead. They are ready to profit from that bursting bubble. Our job is to recognize the bubbles all around us, get out of the way of the pain, and be ready to strike when the prices drop.

Harry’s book is available tomorrow on Amazon. Get your copy.

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Rodney

Follow me on Twitter @RJHSDent

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Categories: Education

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.