Student Loan Chargebacks

One of the most questionable practices by a company I had ever seen was the aggressive implementation of chargebacks.  Although this practice caused severe hardship to several small business people. I’m thinking there may be some validity to its use in the educational sector.

First a quick primer on chargebacks: I’m not talking about credit card chargeback, i’m talking dealer channel chargebacks.  In this instance, chargebacks are practice Used by large corporations that maintain a dealer channel where the product or service includes a contract with the end user.  Think cell phones or satellite dish sales.  The theory goes that the channel has been trained and is supposed to focus on good end users who will fulfill the terms of the contract, if they don’t then the retailer is charged back any capital that is outlayed by the large corporation. This capital can be in the form of services, equipment, or commissions paid to the retailer. The questionable nature of chargebacks comes from the fact that the dealer can do everything in their power to find and sell the quality end users that in many cases are pre-approved by the large corporation. Unfortunately in any situation, including business and private sector, conditions can change over the course of a contract and the contract may not be fulfilled.  The end user may be able to fulfill their contract or unforeseen circumstances may hinder their ability to fulfill it.  So as is the case when you have one large corporation ‘partnering’ with many small businesses, the control and the power of the large corporation allows them to engage in morally ambiguous, if legal, practices and maintain power over the small business  where they have little recourse other than to accept the terms.  Ultimately the small business is co -signing on the contract with end user.  

In my experience the Practical result of this type of policy is that it quickly eliminates the really questionable retailers who are trying to game the system.  It also negatively impacts some of the good ones who are doing everything right.  The really good retailers who stick around have gotten wounded a few times so they are extra cautious on delivering the type of end user who is highly stable, and exactly what the large corporation wants.   

What if we were to use this same model with student loans. We currently have an educational environment where, although it’s politically Incorrect to say it, the Universities and Colleges are gaming the system by encouraging tens of thousands of students to take-out collectively what amounts to hundreds of millions of dollars in student loans every year.  This debt is to obtain degrees and credentials that in many cases do not lead to guaranteed income.  Ok, we all know about the student loan crisis and of the debate on how to handle the current situation.. But how do we stop it from happening in the future?  Enter student loan chargebacks!

Imagine a system where educational institutions have to cosign a loan contract. What if they were chargebacks to the educational institution on student loans were the students were unable to complete their degree or certificate program?  What if there were chargebacks to educational institutions where the degree didn’t lead to an income capable of sustaining a lifestyle that included all the necessities of life as well as paying back the student loans?

Realistically the for-profit colleges who are trying to game the system would go out of business very quickly. A good example of this type of institution would probably be Full Sail University. A Florida based for-profit university that specializes in low income earning degree programs in media production.  I know several students who have graduated from Full Sail with an amazing level of knowledge in media production, tens of thousands of dollars in student debt, and found a job market for their skills where they’re making just pennies over minimum wage.  Not a very good investment in time or resources.  

Colleges and universities would be very careful about what programs they offer and how the number of students they take in align to the real world demands of the job market.  Additionally there would be intense restructuring of the types of services colleges offer to make sure the students who have significant challenges to completing the degree program are given the resources needed (in school, and in managing their personal life) to make sure that they complete what they started.  

This would only work if there was a third-party credentialing body like a licensing organization that would confirm the knowledge gained by the student or an after graduation tracking system that tracked income.

This is one of those pie-in-the-sky ideas that would make perfect sense but is so politically and culturally untenable that it will never happen. Just like in 1945 telling an advertising executive that it’s a good idea to ban smoking ad’s on TV and in Life Magazine.