Is For-Profit Education Hurting the Economy?

By Markets

The recent news that ITT Educational Servicesclosed 130 of its campuses and filed for bankruptcy isn't just important because of what it means for the school's 37,000 students left without degrees. It also has a wider economic significance.

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In this clip from of Industry Focus: Financials, The Motley Fool's Gaby Lapera and John Maxfield discuss how the student loans used to prop up for-profit universities could be translating into lower consumer spending.

A full transcript follows the video.

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This podcast was recorded on Sept. 26, 2016.

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John Maxfield: What they have foundwhen they have talked to these students,they get all these loansand find out that their job prospects aremuch less promising thanITT or these other for-profit colleges have led them to believe. They've found that,in order to service their student loans,people are avoiding medical treatment,they are delaying marriage,they are putting off home buying. So this isn't just a problem with ITT. This is a problem that hasfundamental economic significanceto the wider economy,if all these things are going on,and consumer spending is struggling in our economy,just moving along really slowly. Then certainly,this could be a contributing factor.

Gaby Lapera:Absolutely. If you have gone to ITT Tech andyou are having problems, you can contact the Department of Education; they have resources for you. If you are considering a for-profit university,one of the things you should maybe consider insteadis your local community college. It'sfrequently four times lessexpensive to go to your local community college than it is to go to a for-profit university. Andnot only that, but they'reaccredited by the state. So frequently,you can take credits that you got at your community collegeand transfer them into a four-year degreethat you can get at state public universities. A lot of states have programs with that. And you'll get a much better bang for your buck.

That's actually something else I wanted to talk about -- the accreditation. ITT Tech wasaccredited by the Accrediting Council of Independent Colleges and Schools, which is ACICS, whichI'm going to try to call it, but it's a little bit of a tongue twister. ACICSactually raised a lot of red flags about ITT Tech,but the Department of Education shut them down, too, because ACICS is responsible for accrediting a lot of these for-profit universities, likeUniversity of Phoenix and DeVry, which are prettycommonly well-known names. Those universities have run intoa lot of trouble in the last couple years. The University of Phoenix lost 50,000 students last year, andDeVry has been sued by the Federal Trade Commission for telling students -- exactly the same thing that happened at ITT Tech -- that they could help them get jobs that they could not help them get. Last year,I don't know if you've heard of Corinthian Colleges,but they closed most of their schools down,because the Department of Education gave them a $30 million fine, again, for overstating job rates for graduates. I thinkCorinthian is actually now out of business.

Maxfield:It's coming in this wave where companies need to bemore focused on consumers. What we have foundin the wake of the financial crisisis that the government is actuallyserious about consumer-protection reforms. We'veseen that in banking, we talked about that with Wells Fargo, and what's now going on in the for-profit education space.I think one takeaway for investors who are invested in these companies --a lot of these are actually publicly traded companies -- is that there is serious risk now when you're looking at companies where there isn't a close alignment of interestbetween the various types of stakeholders and the investorsand the customers of whatever these companies are. Where there's a lack of alignment there,with the federal government looking atconsumer protection right now so intently, there'salways the potential now thatyou could have this backlash like we're seeing with banking in for-profit educations. It's just a good thing for investors to add to the points that they look at when they're considering a company.

Gaby Lapera has no position in any stocks mentioned. John Maxfield has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.