Any day now, the federal Department of Education will formally propose new regulations that would cut off federal aid to for-profit colleges whose graduates cannot earn enough to repay their student loans.
The regulations, known as the "gainful employment" rules, are an effort to rein in the high debt loads students take on when they enroll in for-profit colleges that offer certificates or degrees in fields like nursing or culinary arts. Students at for-profit colleges are much more likely than others to default on their loans.
Under the regulations, a draft of which came out in February, for-profit colleges would not be eligible to receive federal student aid if their graduates’ debt load was too high to be repaid, over 10 years, with 8 percent of their starting salary.
The Career College Association, which represents 1,450 for-profit colleges, is lobbying fiercely against the regulations, which it argues are wrong-headed, unnecessary and likely to restrict needy students’ access to vocational training and higher education. With so many community colleges overcrowded, the for-profit colleges say, their programs represent the nation’s best hope for training much-needed health care workers and technicians.
The association criticizes almost every element of the regulations: the 8 percent debt limit, the 10-year repayment period and the underlying idea that high debt loads lead to loan default.
“Shouldn’t the Department of Education have to present some facts and figures showing that there’s really a problem with students who have debt-income ratios above 8 percent?” said Harris Miller, president of the association. “They haven’t shown any evidence. And our own research shows that students with high debt-income ratios actually default less than students with low debt-income ratios.”
Arne Duncan, the secretary of education, has avoided demonizing the for-profit schools. In a May speech, he said that despite a “few bad apples,” for-profit colleges play a vital role in helping the nation reach the Obama administration’s goal of having the world’s best-educated work force by 2020.
Advocacy groups representing students and consumers are less diplomatic. “These programs overpromise, underdeliver and load vulnerable students up with way too much debt,” said Chris Lindstrom, higher education program director at the U.S. Public Interest Research Group, part of a coalition of education, consumer, student and public interest groups supporting the regulations.
In 2007, coalition members said, students at for-profit colleges made up only 7 percent of those in higher education but 44 percent of those defaulting on federal student loans. Adding new fuel to the fire was a recent presentation at a New York conference for investors by Steven Eisman, a hedge-fund manager known for having anticipated the housing market crash.
Mr. Eisman, whose early awareness of structural problems in the housing market is described in Michael Lewis’s bestseller “The Big Short,” said the for-profit education industry, like the subprime mortgage industry, has rested on the proliferation of loans to low-income people who would not be able to repay them.
Without tighter government regulation, Mr. Eisman predicted, students at for-profit colleges will default on $275 billion of student loans over the next decade.
“Until recently I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry,” said Mr. Eisman, of FrontPoint Partners, a unit of Morgan Stanley. “I was wrong. The for-profit education industry has proven equal to the task.”
In an interview last week, Mr. Eisman said the gainful employment regulations help change the for-profits’ business model of aggressively recruiting needy students eligible for maximum federal aid.
For-profit colleges typically get three-quarters of their revenues from federal grants and loans — and some, like Apollo Group, which owns the University of Phoenix, nearly 90 percent, the legal limit. Federal aid for students at for-profit colleges has more than quintupled, to $26.5 billion, since 2000.
“The University of Phoenix got about a billion dollars in Pell grants last year, and when you have any institution growing that rapidly, it’s only fiscally prudent to take a look at it,” said Mark Kantrowitz of Finaid.org, a financial aid Web site.
Sara Jones, a spokeswoman for Apollo, said in a prepared statement that with 458,000 students, the University of Phoenix’s status as the largest recipient of federal financial aid makes sense. The statement also said that the university had a lower default rate than for-profits generally, and that in the last year half its students had borrowed less than the maximum available.
Federal law has long said that federal student aid can go only to for-profit colleges that “prepare student for gainful employment in a recognized occupation.” But this is the government’s first effort to define “gainful employment” in relation to graduates’ debt-to-income loads.
“With a record number of students attending programs that are subject to this requirement, and a record amount of taxpayer money being used to enable them to attend, it’s more important than ever to make sure they’re getting their money’s worth,” said Pauline Abernathy, vice president of the Institute for College Access and Success, part of the coalition supporting the regulations.
A study conducted by Charles River Associates for the Career College Association estimated that 18 percent of for-profit colleges’ programs, serving a third of for-profits’ students, would not satisfy the gainful employment regulations. But supporters of the regulations said for-profit colleges tended to have very high operating margins and could still make healthy profits if they lowered their tuition to avoid running afoul of the new rules.
The regulations’ 8 percent standard is not absolute: Programs that fail it could retain eligibility for aid if their students achieved other standards like high levels of repayment or employment.
For-profit colleges, which contribute generously to Democrats and Republicans alike, have substantial influence in Congress. On the Career College Association’s annual Hill Day in March, members met with aides in almost every Congressional office, telling them the regulations would limit access to college for minority students with few other options.
After the draft regulations are issued, there will be a public comment period, and final rules will be issued by Nov. 1, to take effect in July 2011.