05/23/2012 05:15 pm ET Updated Jul 23, 2012

To Rein-in Student Loan Debt, Rein-in For-Profit Colleges

There is a new bubble on the economic horizon -- the $1 trillion (and counting) student loan explosion. The aggregate amount of student debt now exceeds total U.S. credit card indebtedness.

Many current students are underwater and 45 percent of those who are starting colleges will never earn the degrees that would provide the jobs needed to pay off their loans. We have a 'graduation gridlock' in this country with a college dropout rate equivalent to the worst we imagine from inner city public high schools.

The U.S. taxpayers -- not the schools -- are now on the hook for every dollar of U.S. student loan debt that is not repaid.

For-profit colleges have become like originators of subprime mortgages during the housing bubble. It is an age of 'subprime' student loan debt fueled by Wall Street stock offerings. Boom-time investors correctly perceived that these colleges had invented a "golden goose" business model to die for, all financed by the U.S. taxpayer.

Because traditional universities annually turn away many thousands of students whose work and life schedules don't fit the "academic calendar," the for-profits have been able to seize the opportunity to marry Internet classes with federal student aid to serve this degree-hungry population.

Using commoditized degree programs scheduled at convenient times and matching term-by-term tuition with maximum available federal money, the for-profits have raked in profits with no 'skin in the game'. How they get away with it: under federal law, if a student defaults on their loans, it's the taxpayer, not the school that is left on the hook.

Rules intended to curb these schools shoddy marketing practices were "lobbied down" after the buzz of congressional investigations faded. And they won't kick in anytime soon or address the core risk-shifting issue underlying this business model that makes taxpayers their underwriters.

Taxpayers need to demand new 'no-frills' pathways to expeditious and convenient public degree completion programs. The for-profit golden goose would best be disciplined in three powerful ways:

1. Lower back to 75 percent the federal threshold limit on the percentage of tuition dollars sourced to U.S. taxpayer aid, including benefits to veterans and active duty personnel.

2. Require the for-profits to publicly disclose the ratios of marketing expense to educational expense attributed to each tuition dollar, so that prospective students can discern for themselves whether their success is really the schools' highest priority. Currently, student recruiting expenditures are typically 25 percent or more of for-profit tuition income, compared with about five percent in other U.S. universities, and frequently near a 1-to-1 ratio with expenditures on classes and teachers.

3. All universities with 50 percent or more of tuition income sourced to federal education loans should be required to keep some 'skin in the game' as a percentage of risk they bear on loan defaults. Perhaps five percent risk retention, with a sliding scale below that for amounts under the 50 percent benchmark threshold, would be a sufficient starting place for restoring taxpayer -- and student -- confidence in the huge investments they are making in higher education.