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For-Profit College Reforms Stir Debate

The U.S. Department of Education is proposing new rules to oversee the growing field of for-profit higher education, but it kicked the can down the road on the most controversial idea: making institutions prove that their graduates find “gainful employment.”

Doing that would require some complicated and uncomfortable math for the schools: calculating “debt-to-income loads,” which is the ratio between how much a graduate owes in student loans and how much he or she earns. If the salaries are insufficient to pay off the debts – a common complaint among graduates of for-profits – the institutions would lose federal education funding and likely close.

With billions of dollars at stake, for-profit colleges lobbied heavily against a plan floated a few months ago by the Education Department to link gainful employment to an 8 percent debt-to-income load, which the industry said would put many programs out of business. The lobbying appears to have worked to shelve that proposal, at least for now: on Tuesday, the department announced new rules covering 13 of 14 areas of for-profit higher education reform, leaving the gainful employment proposal for “later in the summer.”

The changes could be particularly significant for disadvantaged, minority and self-supporting youths and adults, who enroll in higher percentages at for-profit colleges and vocational education institutions. Many of these students have complained that some for-profits provide educations that are of little use in the job market, while saddling them with extraordinary student loan debts that they cannot pay off.

Among the proposed rules, which will be officially put out for public comment Friday:

• completely eliminate bonuses to recruiters for securing student enrollment by removing “safe harbors” in current laws that allow some such bonuses;
• require the institutions to evaluate the validity of a student’s high school diploma if there is reason to believe it is suspect;
• specifically define a credit hour and establish procedures to determine whether an institution’s assignment of a credit hour is acceptable; and
• strengthen the department’s authority to take action against institutions allegedly engaged in deceptive advertising, marketing and sales.

The Career College Association, which says it represents 1,800 private postsecondary institutions and has led the field’s response to the proposals, said this week that it supports most of the reforms but will fight the proposal dealing with recruitment bonuses. And it said it was glad that the gainful employment proposal has been postponed.

But the fight is hardly over.

The Problem

In an op-ed for AOL News in April, Education Secretary Arne Duncan argued that reform of the for-profit higher education field is needed because “many former students of vocational programs have reported that they were enticed into programs that did not deliver. They reported that their programs fell far short of providing the education and training needed to be gainfully employed.” He cited media accounts of students who “received a shoddy education at vocational schools, [and] are now unable to find jobs and are saddled with huge student debts.”

Tuition at for-profit institutions tends to be several times that of public and nonprofit colleges and universities, and the average student debt is far higher as well: $32,650 for borrowers who earned bachelor’s degrees, according to the College Board, compared with $22,380 for similar students from private nonprofits and $17,700 among those from public four-year universities.

The two-year cohort student loan default rate among graduates of for-profits is 11 percent, compared with 3.8 percent among students attending nonprofit colleges and 5.9 percent among students attending public colleges.

Mark Kantrowitz, publisher of the FinAid and FastWeb websites and a student aid data analyst, estimates that 60 percent of the for-profits’ default rate is based on demographics – the student population is less well-off financially to start with, for instance, making defaults more likely – while 40 percent is attributable to other factors, such as institutional quality.

The Higher Education Act of 1965 actually requires that in order for students to get federal financial aid (such as Pell grants), proprietary and vocational colleges, with certain defined exceptions, must deliver training “to prepare students for gainful employment in a recognized occupation.” The act, however, does not define “gainful employment,” so last year the Education Department convened an expert panel to come up with a definition. The panel failed to reach an agreement, and the department said it would produce one.

The department’s initial formula would have essentially measured the debt-to-income ratio of a program’s graduates based on their expected earnings using U.S. Department of Labor estimates for occupations and a 10-year loan repayment plan. If most of the graduates’ loan payments exceeded 8 percent of their projected earnings over those 10 years, the program’s students would not be eligible for federal financial aid.

The plan would have heavily affected for-profits, whose students tend to rely more on federal aid. The Associated Press reported last year that the five biggest recipients of Pell grant funding are for-profit institutions. At some of the schools, two-thirds of the student population receive this assistance. By comparison, just 7 percent of the Harvard student population needs a Pell grant.

“It’s certainly a very big difference between these schools,” Kantrowitz said. “The open question that nobody has an answer to … is whether this is because the [for-profit] colleges are serving an underserved community or because they are exploiting them. It’s probably a mixture of the two.”

Reactions

In April, the Washington-based Career College Association (CAA) released a report estimating that under the 8 percent rule nearly one-fifth of the 10,000 programs it surveyed would become ineligible for federal student aid and might therefore shut down.

The affected institutions could appeal on various grounds, such as by providing data that show that their graduates are actually earning more than the federal projections say they would.

Appeals aside, the CCA objected to the 8 percent threshold on several grounds.

First, it said in a letter to Duncan this spring, there are no data to support the hypothesis that people with high debt-to-income ratios are less likely to repay their student loans. In fact, it argued, “graduates with higher debt-to-income ratios are more likely … to repay their student loans.”

The letter said the proposal would adversely affect stellar academic institutions as well as “a few ‘bad actor’ programs or institutions,” thus displacing hundreds of thousands of students.

The association (now called the Association of Private Sector Colleges and Universities) said that instead of a calculated ratio, the department could achieve its goals with various other measures, such as educating students about loans, basing their ability to pay on their likely income, having institutions provide wage and salary data for graduates and using federally calculated average wage and salary information for the occupations students are preparing for.

Some community college associations, such as the National Alliance of Community and Technical Colleges, wrote to Duncan in support of the proposal, even though rules would not directly affect those institutions. The alliance did so, said Executive Director Robert H. McCabe, because “a number of proprietary colleges really charge people money and don’t give them anything. There are a lot of good ones, but there are a lot that are not.”

Kantrowitz called the 8 percent threshold “harsh,” and said it would have eliminated too many worthy programs that serve at-risk populations. While for-profit-educated students may have a higher default rate, “it’s good public policy to be investing money in these populations to eliminate poverty, for example, even if it does cost you a little bit more.”

But if the Education Department takes another crack at creating a “carefully designed objective rule” on gainful employment, Kantrowitz said – something between a 10 or 15 percent threshold, for instance – that could help separate the for-profit “wheat from the chaff” and potentially “improve the quality of the entire industry.”

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