Trade Schools and Student Loans – Double Trouble?

An article recently appeared in the New York Times discussing how many for-profit business schools are doing very well in these difficult times. However, it seems that his students don’t always do so well. Federally backed student loans are used to pay for this training more than 80% of the time, and many students cannot afford their debt load when it comes time to pay them off.

Many of these trade schools are frequently advertised on television and have subsequently become household names. Some examples are the University of Phoenix, ITT Technical College, and the Cordon Bleu Cooking School, among many others. It is not uncommon for these for-profit schools to be multi-billion dollar a year companies. The fees they charge can be substantial, sometimes exceeding $40,000 for a two-year program in some cases.

These trading schools have been on the rise lately due to the recession. People see that business is bad and the future does not look bright for many, and they think that the only way to get ahead and lead a decent lifestyle in the future is to get training and have a well-paid job. The problem is that they are fooled in many cases. They do this by listening to recruiters at these schools who tell them that they are likely to be placed in a job through the industry connections the school has developed. They are also led to believe that they can expect a certain level of salary upon graduation, and this often turns out to be totally unrealistic. Of course, these numbers are never put in writing and are not guarantees, but people tend to cling to these dreams and find themselves in trouble when they don’t earn the salary they expected and can’t pay student loan payments after finishing school. trade. .

It’s a student loan axiom that a person should only borrow in total as much as their first year’s salary is expected to be; beyond that, the debt burden will be too high. If someone were to borrow $40,000 for a two-year trade school program, this would lead to payments of $460 per month over a ten-year repayment period. Another axiom is that student loan installment payments should not exceed 10% of a person’s monthly income. So someone would have to start making around $55,000 per year to pay off that level of student loan debt. There aren’t that many jobs that pay $55,000 for recent trade school graduates.

Worse than that, alumni often face underemployment and jobs that pay close to minimum wage, if they are hired at all. It’s not unusual for people who graduate from culinary schools to get jobs cleaning tables or washing dishes instead of being the glorious chef they hoped to be, for example.

However, trade schools are doing very well. In fact, in many cases, they have started offering student loans themselves. As noted above, these schools average over 80% of their revenue from student loans. So why would they lend additional funds, indeed their own money, to students? Much of this loan money ends up being written off as bad debt, so what’s going on? The answer is that there is a requirement when applying for federal student loans that at least 10% of the cost of education be paid by the student or by other private sources. So trade schools step in and loan students money to meet these requirements. Their business, which is financed by federal student loans, is so good that the repayments on the money they lend to the students themselves are worth it.

It could be worse. There are many trade schools that are not well established household names like the companies cited above. There are many smaller, non-accredited schools. Sometimes these schools just close and the students get to keep the bag. And that bag is heavy because these types of schools, being non-accredited, are not sanctioned by federal student programs, so private student loans are required if the student needs to borrow money, which is the case most of the time. . Private student loans have much higher interest rates and much less protection for borrowers than federal loans. Thus, the student is left with a heavy loan burden and no trade school job credentials that she can use to find employment and pay off her student loan debt. There are increasing reports of business schools going bankrupt and closing in one location and then opening and starting again in another location with a different name and organizational structure.