An Obama administration official told Senate Democrats on Tuesday that new rules for for-profit colleges are just the beginning in targeting programs earning taxpayer-subsidized profits while leaving students with high debts.
The Department of Education last week released its final "gainful employment" rule, mandating that career education programs meet standards of student loan debt related to income by 2015 or else lose their eligibility for federal loans and grants — which provide the vast majority of many for-profit schools’ revenue.
Pittsburgh-based Education Management Corp., which includes The Art Institutes and other schools, enrolls about 150,000 students, the second most of any for-profit education company in the country. A company spokeswoman said Tuesday that it is still reviewing the rules to see how the company would be impacted.
The four-year lag time and the somewhat softer standards in the final rule, as opposed to what the administration originally proposed, disappointed many advocates and Democrats who had called for more. Sen. Tom Harkin, D-Iowa, who has led an investigation into the companies for more than a year held a hearing Tuesday on the disproportionately high debt loads of students at for-profit schools and pressed Under Secretary for Education Martha Kanter on whether gainful employment would be enough.
"We’ve done our best to create a good starting point for this," she said.
Ms. Kanter said the department is looking into some of the shady practices exposed by Mr. Harkin’s Health, Education, Labor and Pensions Committee, media reports and lawsuits. Revelations include misrepresentation by recruiters to potential students about the costs and accreditation for the schools, as well as companies that pay recruiters entirely based on how many students they enroll, which is illegal.
"We’re looking at a whole package of reforms to help that sector do a better job so students can be first," she said.
Mr. Harkin called the new regulations a "modest first step" and urged the department to go further. It is now changing its scrutiny of loan payments from looking at how many students default within two years to a three-year default window.
Mr. Harkin asked Ms. Kanter to look at a 10-year default window — in which at some schools defaults top 70 percent, according to documents released by the committee. Mr. Harkin and others compared the situation to the subprime mortgage crisis.
For-profit colleges argue they have been unfairly targeted by Democrats and the administration and they fill an important niche for nontraditional students by offering primarily flexible, career-oriented classes. They launched an aggressive public and private lobbying campaign to weaken the regulations, and House Republicans have pushed a bill to block their implementation.
The final rule mandates that a program meet one of three standards in order to receive federal funds: at least 35 percent of students are repaying loans, or that loan repayments do not exceed 30 percent of their discretionary income or 12 percent of their total earnings. Because the rule was watered down and its implementation delayed, the news sent for-profit education stocks — including EDMC’s — soaring when it was announced.
This chafed Mr. Harkin, who said it was further evidence the regulation did not go far enough. It is unclear, though, what would be enough.
Advocates who testified Tuesday said the newly created Consumer Financial Protection Bureau should have a look at the companies’ recruiting practices. Mr. Harkin said he is considering drafting as-yet-unspecified legislation, but he isn’t going to have any GOP help in writing it.
Republicans followed through on their April threat to boycott any for-profit college hearings, complaining they are "disorganized and prejudicial." Previous hearings had brought claims from Republicans that Democrats are against free enterprise and accusations of tampering with a Government Accountability Office report that cast the colleges in an unflattering light and later was revised with more context. Allied with the industry, they argue that reforms should focus on all types of higher education, where high debt and poor job prospects are common.
Democrats reply that the for-profit sector, which produces half of all student defaults even though they educate only 12 percent of students, is ripe for stricter examination.
So Tuesday no GOP senators appeared and no witnesses sympathetic to their cause were invited, leaving Democrats to attack industry practices without rebuttal.