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We , a Nevada-based company that left the 2,500 students who attended its flight academies on Super Bowl Sunday and filed for bankruptcy liquidation.

, Silver States’ entire existence depended on the willingness of loan companies — in this case, and the Pennsylvania Higher Education Assistance Agency (PHEAA) through its national brand American Education Services — to make and service high-cost private loans to help students cover the $70,000 cost that they were required to pay up front to attend the unlicensed and unaccredited flight schools. Unfortunately, Silver State students are now stuck repaying these private loans for training they did not ultimately receive.

Silver State is hardly an isolated case.

There has been in recent years a proliferation of unlicensed and unaccredited trade schools that do not participate in the federal student aid programs and therefore go largely unregulated. Their growth has been fueled by lenders that have willingly and irresponsibly “partnered” with these institutions to provide expensive private loans to the at-risk students these schools tend to attract. The lenders have then turned around and, like subprime mortgage lenders, securitized the loans, shifting the risk of the loans onto unsuspecting investors.

Reviving Trade School Scams

These practices first came to light several years ago , leaving their students without training and with heavy private loan debt. Just like Silver State, these schools (owned by now-defunct chains such as , , and , among others) had forged sweetheart deals with the loan giants Sallie Mae and KeyBank to provide their students with tens of thousands of dollars of private loans to cover the full cost of tuition upfront before any classes were provided.

Consumer lawyer exposed these deals in an article entitled “The Finance Industry Fuels Revival of Trade School Scams,” which ran but received little attention at the time. In the article, Domonoske explained how the easy availability of private loans helped disreputable schools thrive by allowing them to attract students without having to worry about being regulated by the federal government.

In the late 1980’s and the early 1990’s, the federal government was on an explosion of fly-by-night trade schools set up solely for the purpose of reaping profits from the federal student aid programs. To avoid another student loan-proprietary school debacle, policymakers began requiring schools that participate in the federal student loan program to . The schools must show that they do not pose a danger of closing precipitously.

But disreputable trade school owners found a way to around these rules — by staying out of the federal aid programs and pushing private loans to their students. Meanwhile, lenders, Domonoske wrote, have proved more than willing to provide “liquidity” to these sham schools. “[T]he current problem of school closures in the computer training field would not exist if entities like Sallie Mae and Key Bank were applying similar restrictions” to those of the government, Domonoske wrote at the time.

The Loan Industry’s Complicity

Under pressure from consumer advocates, Sallie Mae . But Key Bank apparently continues to do so. And, in light of the Silver State Helicopters case, other lenders, like Student Loan Xpress and the non-profit state agency, PHEAA, appear to have picked up the slack.

Why would lenders ever agree to make such risky loans in the first place? Don’t loan providers pay a price for making loans to students attending sham schools? Not if they securitize the loans and get them off their books. As Domonoske puts it:

“Key Bank’s willingness to fund bad loans seems at first glance to be counterproductive for its own bottom line. However, Key Bank does not intend to hold all the loans during their repayment period; instead it pools and sells the loans to investors. Through a process called “asset-backed securitization,” Key Bank obtains full value for the loans by selling them to an investment trust. It sells the loans as if they were honest and legitimate transactions solicited by schools that were acting properly…Consequently, the investors pay full value without a disclosure of the inherent defects in the loan.”

In other words, by providing huge private loans to students attending unlicensed, unaccredited schools and then securitizing the debt, the lenders have not only caused great harm to students but have also deliberately misled investors.

As policymakers consider a bail out the student loan industry from the credit crunch beyond legislation passed in the Senate yesterday, they need to remember that lenders have brought a good part of these problems onto themselves. Lenders have dumped lots of bad private student loans onto the marketplace, knowing full well that much of this debt was likely to go into default. Is it any wonder that?