The recent news that ITT Educational Services closed 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.
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.
This podcast was recorded on Sept. 26, 2016.
John Maxfield: What they have found when they have talked to these students, they get all these loans and find out that their job prospects are much less promising than ITT 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 has fundamental economic significance to 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 and you 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 instead is your local community college. It's frequently four times less expensive to go to your local community college than it is to go to a for-profit university. And not only that, but they're accredited by the state. So frequently, you can take credits that you got at your community college and transfer them into a four-year degree that 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 was accredited by the Accrediting Council of Independent Colleges and Schools, which is ACICS, which I'm going to try to call it, but it's a little bit of a tongue twister. ACICS actually 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, like University of Phoenix and DeVry, which are pretty commonly well-known names. Those universities have run into a lot of trouble in the last couple years. The University of Phoenix lost 50,000 students last year, and DeVry 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 think Corinthian is actually now out of business.
Maxfield: It's coming in this wave where companies need to be more focused on consumers. What we have found in the wake of the financial crisis is that the government is actually serious about consumer-protection reforms. We've seen 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 interest between the various types of stakeholders and the investors and the customers of whatever these companies are. Where there's a lack of alignment there, with the federal government looking at consumer protection right now so intently, there's always the potential now that you 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.