For-profits: Two New Rules that Really Matter

The Obama administration on Tuesday proposed 14 new rules to curb abuses in the for-profit sector of higher education. Most of the debate, though, has focused on two.

The rules cut to the heart of how the for-profits do business — or don’t. Industry leaders say the sector is well-run and regulated quite enough already. They complain of death by a thousand anecdotes via a series of recent press accounts that highlight disgruntled former students and employees. Critics allege a pattern of abuse, of which the alleged horror stories are merely illustrations.

(Disclosure: the for-profit industry includes Kaplan, owned by the Washington Post Co.)

One new rule would halt over-zealous recruiting tactics by some for-profit colleges, by barring the industry from compensating recruiters on the basis of how many students they bring in.

The other would require vocational programs to yield "gainful employment," as measured by the ratio of salary to loan debt among graduates. This rule would cut federal aid to for-profit schools if graduates spent more than 8 percent of their starting salaries on loan payments.

The "incentive compensation" measure was issued Tuesday. Final details of the "gainful employment" rule will be issued in coming weeks, possibly in watered-down form.

Critics of for-profit colleges say the sector has an unhealthy obsession with boosting enrollment numbers, which generate revenues and please investors. The relentless push for new students has led some colleges to compensate recruiters based on how many students they recruit, the same "incentive compensation" program associated with telemarketers.

"I don’t think we should sell higher education the way we sell timeshares," said Terry Hartle of the American Council on Education, a group that represents college presidents and provosts.
In 1992, Congress prohibited colleges from compensating recruiters based solely on how many students they brought in. But a series of "safe harbor" caveats, added in subsequent years, allowed the practice to continue. The proposed rule change would restore the original 1992 law.

"It creates such an aggressive marketing atmosphere that a person will do almost anything to get a student into the program," said Chris Lindstrom, higher education program director at the U.S. Public Interest Research Group, a group that supports the proposed regulations.

Harris Miller, president of the Career College Association, an industry group representing for-profit colleges, said the "incentive compensation" rule will only seed confusion. The problem, he said, is that the 1992 law was too vague. Colleges didn’t know whether they could base only part of a recruiter’s salary on admission numbers, or could use recruitment numbers as part of a complex formula for compensation.

The for-profit community agrees with the administration, Miller said, that recruiters shouldn’t be paid solely on students admitted. But the proposed regulation is " too fuzzy," he said, "which is always a prescription for a lot of lawyers making a lot of money."

While there’s fundamental agreement on the wisdom of curbing over-zealous recruiters, there is no such consensus on the question of capping student debt.

The hotly disputed "gainful employment" regulation would somehow cap student debt in vocational higher education programs. A widely circulated Education Department proposal said a program might have to generate a sufficiently high salary and sufficiently low debt that loan payments averaged no more than 8 percent of salary.

Critics of for-profit education say the sector generates intolerable levels of debt. The median debt level in 2007-08 was $9,744 in for-profit certificate programs, $18,783 in associate degree programs and $32,653 in bachelor’s programs, higher than comparable levels at not-for-profit colleges. There is also concern over student loan default rates, 11 percent in for-profit schools compared with 7 percent in higher education generally.

For-profit advocates say their students are bound to carry more debt, because their sector serves a larger relative share of low-income and self-supporting students than any other.

The proposed regulation is misguided, Miller said, because it presumes students with greater debt are more likely to default. In fact, default rates tend to be lower among students who stay in school longer and generate more debt.

"The real problem with student loan defaults is in students who don’t complete" their academic program, Miller said.

Hartle of ACE said student loan debt is "a very important issue" but that the proposed "gainful employment" rules appear to take the wrong approach.

"The department really doesn’t have the data to make the high-stakes calculations that they’re attempting," he said.

Hartle said the administration was right to delay action on the gainful employment rule.

Lindstrom, of U.S. PIRG, worries it will be watered down.

"At a certain percentage level," she said, "that debt-to-income level becomes meaningless."


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