Subordinating the Public Good to Private Profit: The Abuses of the Department of Education Under DeVos

It is one of the many ironies of contemporary American politics: On the one hand, portions of the Republican Party attack the nation’s leading public institutions of higher education. On the other, the federal government withdraws scrutiny from for-profit colleges, some of which do nothing more than exploit vulnerable populations of students.

Like so much Republican Party propaganda, the campaign against American universities, which have contributed enormously and in multiple ways to U.S. global leadership in the decades since World War II, has been effective. The consequences have been popular discourses ranging from the insistence that universities smother free speech to the more fundamental claim that college may just not be “worth it.”

One consequence of this assault on not-for-profit higher education institutions is to make for-profit colleges look less unattractive in comparison – a development in synch with the current administration’s elevation of activities that generate private profit over investments in the public good.

The Department of Education under Betsy DeVos has embarked on a systematic deconstruction of efforts to investigate and punish fraudulent activity at for-profit colleges. Why, in a capitalist economy, would we wish to encourage and abet fraud?

Last week it became public that DeVos has appointed as the head of one of the Department’s teams that had been investigating fraudulent activity at for-profit institutions a Dean from one of the largest colleges formerly under scrutiny.

De Vos has appointed other officials from for-profit institutions to senior positions in the Department of Education – displaying the blatant disdain for rule of law and the public good repeatedly demonstrated by this administration.

This week, the New York Times reported on the frustrations of New Jersey’s Attorney General as the Department of Education withdraws its cooperation on efforts to punish fraudulent activities exploiting students at for-profit colleges in that state.

The scope of federal support for for-profit colleges is not new, and has been a problem in our system of higher education for years. In 2010, a Government Accountability Office (GAO) report documented the explosion in enrollment at for-profit colleges, which were the beneficiaries of $4 billion in Pell Grants and $20 billion in federal loans provided by the Department of Education in 2009.

In 2008-9, for profit institutions received 23% of the $105 billion total in federal grant and loan funding to higher education. Furthermore, for-profit colleges garner a large share of their funding from the federal government; in 2014-15, 30% of 1838 for-profit institutions received more than 80% of their funds from federal financial aid.

These institutions do enroll a disproportionate share of financially needy students; nonetheless, a model in which institutional existence is based on pulling in students and their federal loan money should at the very least face tough public scrutiny to ensure students are well-served. In the event they are not, the model comprises a grossly ironic federal subsidization of the for-profit system.For-Profit-College-List-4.png

The GAO report focused on 15 for-profit institutions, identifying fraudulent activities at 4 of these, and deceptive practices (including misleading information about graduation rates, accreditation, program costs and earnings potential) at all 15. While there are undoubtedly some honest for-profit institutions, the GAO report establishes that deception is the prevailing business model.

The Obama Administration drafted regulations to address these issues, citing the high debt to earnings ratio of student borrowers at for-profits as well as their high loan default rate – 11.9%, nearly double the 6.2% rate at public colleges.

Federal regulations drafted in 2010-11 established debt to earnings limits, adjusted based on program-completion and job placement rates.

According to the Sunlight Foundation, when the Obama Administration began pursuing regulations to address the high level of student loan defaults at for-profit colleges, the industry responded by tripling its funds spent on lobbying to more than $7.5 million. Lobbying activity intensified in 2011, focused on contact with officials in the then-Democratic administration. Reporting from the time refers to the industry’s “aggressive efforts, even by Washington standards.” As a Penn State education professor who studied the process concluded, “the industry did largely what it set out to do.”  “The Department of Education,” he added, “really bent to the lobbying push.”

With the new administration, subordination of the public good to private profit, and the misallocation of federal resources, have become far more egregious.

In recent weeks I’ve written about the evisceration of the Consumer Financial Protection Bureau; policy making there, at the Department of Education, the Environmental Protection Agency, etc. reveal a very clear pattern: industry personnel are being ushered into the federal government not for their business expertise, but so that they may systematically restructure federal regulation in the service of private profit and at the expense of American citizens.

Other than those who are profiting from predatory financial and marketing practices, which Americans are served by these policies?

No citizen, regardless of political inclination, has an interest in supporting this massive fleecing of the American people and the resources of the federal government at the hands of a colossally corrupt administration. The damage is spreading; Americans of all political persuasions should be alarmed.

Payday Lending Empowered by Executive Corruption

Predatory economic practices continue to expand in the American economy. Payday lending is perhaps the most egregious example.

Why do we permit such practices? The arguments for practices such as payday lending are twofold. First, defenders of the industry suggest payday lending firms fill a market niche. Those who cannot qualify for conventional loans from banks need access to credit; payday lending provides this service. Second, freedom of choice and individual responsibility. Individual consumers, that is, should have choices, and should be permitted scope for responsibility for their financial decisions.

So where’s the problem?

Let’s start with the second justification: choice. Those who avail themselves of such loans typically face desperate situations that skew their choices. The car has just broken down. Borrow money on a short-term basis to cover the cost of the repair, knowing the terms are painful, or fail to show up for work and lose one’s source of future income? With an unexpected reduction in shifts at work and a consequently smaller paycheck, there is not quite enough money to pay the rent. Borrow on a short-term basis to fill the shortfall, or let the rent go and face the risk of eviction and homelessness?  Among others, David Shipler documented precisely such cases in his 2005 book, The Working Poor and Barabara Ehrenreich revealed such dynamics in her 2001 work Nickel and Dimed: On (Not) Getting By in America.

In his recently released and acclaimed work, Evicted: Poverty and Profit in the American City, Matthew Desmond writes that “Most of the 12 million Americans who take out high-interest payday loans do not do so to buy luxury items or cover unexpected expenses but to pay the rent or gas bill, buy food, or meet other regular expenses. Payday loans are but one of many financial techniques . . . specifically designed to pull money from the pockets of the poor.”

The point is that living at the margins of subsistence alters the decision-making environment; for the poor, such choices are rational. As economists describe this, liquidity constraints affect intertemporal choices — that is, when money is very scarce, decision-making is more heavily weighted toward navigating the present.

The problem with arguments based blandly on individual responsibility is that they implicitly assume we all face the same temporal tradeoffs. (In other words, if I delay gratification and invest now, I’ll have more in the future. Sure, if you have the security of circumstances to comfortably move through the present. If not, the premise is fundamentally misguided.)

Turning to the first case for the existence of short-term lending secured by the borrower’s next paycheck, the implication is that the practice should be regulated because of the gross imbalance between the desperation of the borrower and the profit motive of the lender.

CFPB_Chartbook2.jpg
Source: The Pew Charitable Trusts, “CFPB Proposal for Payday and Other Small Loans: A survey of Americans,” http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2015/07/cfpb-proposal-for-payday-and-other-small-loans

The balanced solution, then, is to subject payday lending to reasonable regulation. Lenders can fill the market niche and earn a profit, without ruining the lives of people who live on the financial margins and who are readily tipped into despair. Organizations like the Center for Responsible Lending, which points out that the average payday loan carries an effective interest rate of 391% have been advocating for regulation for well over a decade.

Along the way, they have faced opposition from those who elevate “individual choice” to sacred status in complete abstraction of the conditions under which choices are made – such as this vapid assessment from the libertarian Mises Institute: “On the margin, it is the borrower and lender who are most fit to decide the appropriateness of any transaction—not the Center for Responsible Lending, or a congressman.”

But here’s where the story becomes truly disturbing. In the wake of the 2008-9 financial crisis and the numerous abuses by financial services firms revealed in the aftermath of the crisis, the U.S. Congress created the Consumer Financial Protection Bureau.

The CFPB was designed with an intense focus on consumer protection, and following the political battle to confirm its first director during the Obama Administration, it did just that. The Bureau brought cases and imposed fines on financial firms for racial discrimination in lending and for deceptive practices. The Bureau pursued abuses that ultimately returned $12 billion to 28 million consumers.

With the arrival of a new administration, the focus shifted dramatically. As with virtually all executive agencies from the State Department to the Department of Labor to the Department of the Interior to the Department of Education to Housing and Urban Development to the Environmental Protection Agency, directors were put in place with the mission of deconstructing the agency and giving free rein to private actors to take every advantage of the nation’s resources and profit making opportunities created by public sector withdrawal.

Demonstrating utter disdain for the Consumer Financial Protection Bureau, the administration appointed a director who already has a full-time job as Director of the Office of Management and Budget. In his spare time, Mick Mulvaney is systematically dismantling the CFPB, dropping open investigations of financial services firms –including at least one case in which a federal judge has already found the firm guilty of engaging in deceptive practices, and which was awaiting the penalty phase of its case — and actively urging Congress to “cripple” the agency he nominally leads.

Mr. Mulvaney suspended new regulation regulating payday lending scheduled to go into effect in January of this year. And here’s where the disturbing becomes truly grotesque.

As a member of Congress from South Carolina, Mulvaney accepted campaign contributions from the payday lending industry. Bad, but entirely consistent with the level of influence-purchasing that is by now deeply institutionalized in the U.S. Congress. About two weeks ago, at its annual convention, the payday lending industry celebrated Mulvaney’s decision to suspend new regulations.

Where did the convention take place? In the Miama area, at the Trump National Doral Golf Club. A few protestors gathered outside the event, but in the daily chaos and ethical sinkhole of the current administration, relatively few took notice. They took little notice, that is, that the occupant of the White House appointed someone to dismantle regulation of an industry that then acted to put money directly in the pocket of the White House occupant. How can this be?

Those on the political right may wish to defend an anti-regulatory leaning on ideological grounds. Fine. We can respectfully disagree. But why is there not universal outrage in the face of such naked corruption?

The absence of popular outrage demonstrates a couple of sad realities. The institutions responsible for oversight of the ethics of the executive branch are weak, depending for their effectiveness on the executive having a sense of duty and a sense of shame.

Additionally, corruption and profiteering have become normalized in the current administration; the more regularly it occurs, the less we notice.