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Posted by on May 27, 2010 in Education, TG Roundup

For-Profit Education is the New Sub-Prime

I often compared debt ridden students of “for-profit” colleges like U of Phoenix to sub-prime borrowers. I have been writing about this sector on this blog as a big house of cards which could implode any time.

Now I have company. A notable short-seller, no less. [Via Mother Jones]

Steve Eisman, the outspoken investor whose huge wager against the subprime mortgage market was chronicled by author Michael Lewis in his bestselling book The Big Short, has set sights on a new target: for-profit colleges of the kind of you might see advertised on daytime TV and at bus stops. Think ITT Educational Services, Corinthian Colleges, or Education Management Corporation.

In a speech titled “Subprime Goes to College,” delivered Wednesday at the Ira Sohn Investment Research Conference, Eisman blasted the for-profit education industry, likening these companies to the seamy mortgage brokers who peddled explosive subprime loans over the past two decades. “Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry. I was wrong,” Eisman said. “The for-profit education industry has proven equal to the task.” (All of Eisman’s remarks here come from a copy of his prepared remarks obtained by Mother Jones.)

Eisman, a blunt, no-frills portfolio manager at FrontPoint Financial Services Fund, a Morgan Stanley subsidiary, became an overnight sensation as one of the main characters in Lewis’ latest. After witnessing the first wave of subprime madness in the 1990s, Eisman grew skeptical of the industry as a whole, Lewis writes. Then, when subprime surged again in the 2000s, he put his knowledge to work. Needless to say, he’s a lot richer than he was two years ago.

..

Eisman ended with a warning:

Are we going to do this all over again? We just loaded up one generation of Americans with mortgage debt they can’t afford to pay back. Are we going to load up a new generation with student loan debt they can never afford to pay back? The industry is now 25 percent of Title IV money on its way to 40 percent. If its growth is stopped now and it is policed, the problem can be stopped. It is my hope that this administration sees the nature of the problem and begins to act now. If the gainful employment rule goes through as is, then this is only the beginning of the policing of this industry.

But if nothing is done, then we are on the cusp of a new social disaster.

[Read full article here.]