What do loans to students at for-profit schools have to do with you?

You’ve probably heard about Congress's investigation of for-profit colleges. You may not realize that the issues affect you as a taxpayer — not just people who are (or aren't) getting educated at these schools, and who are (or aren't) able to cope with the debt they take on.
 
Like other colleges, for-profit (a.k.a. proprietary) schools in the United States have to abide by what is known as the 90-10 rule: no more than 90 percent of a student’s expenses can be covered by grants and loans from the federal government. The other 10 percent is paid by the student or his or her family; by scholarships; by grants or loans from the state government; or by loans from third parties, like banks — or the schools themselves.
 
Unlike public and private nonprofit universities, though, most for-profit schools rely on as much federal money as possible, usually the full 90 percent allowable by law. Students at for-profits, who tend to come from lower income groups, generally don’t have the family or personal resources of students at traditional schools.
 
"It’s a business model to die for," says Terry Connelly, dean of the Ageno School of Business at Golden Gate University in San Francisco. "These schools get, by federal statute, 90 percent of their income from federal loans and grants — whether the student gets an education or not, finishes or not, pays the money back or not. The proprietary [school] has no downside. When it comes time to collect, it’s entirely the taxpayers’ risk."  
 
That risk is substantial. The schools can, and do, set their own terms for these loans. They are apt to loan to high-risk borrowers, and to charge significantly higher rates of interest than the government. They also expect payments on the loan while the student is still enrolled in school, rather than giving the enrollment deferment that comes with most federal loans.
 
The result? Default rates are as high as 50 percent or more at some proprietary schools. The overall rate at proprietaries is currently 11.6 percent overall, compared to 6.0 percent at public universities and 4.0 percent at private universities. The Department of Education announced on Friday that under the three-year window they'll start using next year instead of the current two-year tracking, the proprietaries' default rate is expected to be 25.0 percent.
 
And when the student defaults on the private loan from the school, he or she will probably also default on federal loans. Federal money given outright, in the form of grants, is pure profit for the school if the student is unable to finish getting a diploma or degree.
 
Naturally, the schools see things somewhat differently.
 
"We serve a sector that would otherwise be unable to attend school," says Kent Jenkins Jr., vice president of public affairs communications at Corinthian Colleges Inc., a major for-profit group. "The high default rate results from who the borrowers are, not the kind of schools they go to."