Double Whammy- Student Loans and Trade Schools

A New York Times article appeared on the internet yesterday discussing how certain trade schools have been flourishing in the current economic recession and how students who attend these schools very often get into trouble with the student loans they took out to pay for them.

A number of these trade schools are billion dollar a year businesses, and one often sees their TV advertisements. Schools like ITT Tech, Cordon Bleu

cooking school, University of Phoenix, and others are household names. It seems that people who are apprehensive about what the future holds for them because of the recession are being recruited in large numbers. Increasingly these students are using federally guaranteed student loans to finance their instruction at these trade schools. And the costs are not cheap. It can cost $40,000 for a two year electronics training program at ITT Tech, for example. Oftentimes the recruiters for these for-profit schools are very aggressive and they tend to imply to future students that they will probably be placed in a job by the school after graduation and they might also imply a salary figure that the student might expect to earn. Of course these “promises” are never in writing, but the report claims that many future students make the mistake of believing the recruiters. The result is that often people who graduate from these for-profit trade school programs end up with a near minimum wage income, if they are employed at all, and a substantial student loan debt that they find is extremely burdensome. A quick look at the FinAid loan calculator for a $40,000 loan to finance the program mentioned above says that monthly payments will be $460.32 for a ten year payoff, which is typical. This is for a Stafford federal loan with interest of 6.8%, which is the actual current interest rate for this type of federal loan. The rule of thumb for student loan borrowing is that people should not have payments that exceed 10% of their monthly income, so a person would have to be earning $4,600 per month in this case, or $55,200 per year. There aren’t many electronic technician jobs out there paying that much for someone just starting out in that profession, and that is assuming that the student will actually find work as an electronics technician.

The article also points out that these trade schools have been making a very high percentage of their revenue from federal student loans, well over 80% recently in most cases. They face the requirement that at least 10% of tuition money for students must come from the students themselves or from other private lending sources. So it appears that they themselves have begun making private loans to students to meet this requirement. They often have to write off this money as bad debt, but it is worth the write-off because it keeps the government loan money coming in.

It could be worse. As was mentioned, many of these trade schools are household names and are big businesses that will be around tomorrow. And it appears they are accredited and thus qualify for government guaranteed student loans. There are many other smaller trade schools around that can disappear tomorrow and leave the student holding the bag on their student loans and with no diploma or marketable skills. Often these types of trade schools are not accredited and thus the only kinds of student loans available for these schools are private student loans. Private student loans have higher interest rates and fewer benefits for the borrower than do federal student loans. It is easy to get into big financial trouble with private student loans, so if you are considering attending one of these smaller trade schools and you have to take out private student loans to pay for it, you would do well to be very, very wary. Even if you do finish the course of instruction, you may find out any job you can get comes with a salary well below what you were led to believe and with loan payments well above what you can afford.