For-profit colleges will have to lower tuition to accommodate student debt loads if U.S. Department of Education regulators get their way.
Proposed rules would require that schools ensure that new graduates’ monthly student loan payments are less than 8 percent of their anticipated median gross income in a 10-year repayment plan.
The draft recommendation comes as student debt nationally has snowballed — particularly among those seeking associate and bachelor’s degrees at for-profit schools.
About 96 percent of students graduating from for-profit colleges with bachelor’s degrees owe money when they finish, according to the College Board.
"I’m worried that some of them (the for-profits) claim they don’t know how much debt their students are in," said Robert Shireman, deputy undersecretary at the Department of Education.
"There are various strategies we think institutions should be taking to help reduce tuition, help decrease debt. . . . Anything we can do to push them helps."
For-profit college students have access to government loans and Pell grants, which enables the Department of Education to consider the regulations.
But for-profit officials say the proposed rules are too harsh and are meant to limit their prosperity — or push them out of business.
"I think maybe there is a hidden motivation here," said Wallace Pond, president of Colorado Technical University, which has more than 30,000 students, mostly online, from across the country.
"I think they’re trying to push students into community colleges, and I don’t think that’s a bad idea. Community colleges are a godsend to many students in this country, but they are experiencing critical capacity issues," he said.
Many programs at Colorado community colleges — where an associate’s degree on average costs students about $6,000, compared with roughly $30,000 at a for-profit school — are full.
This semester, more than 50 programs were placing students on wait lists. At the Metropolitan State College of Denver, students are packed in the campus movie theater and in trailers on campus.
Role urged in national effort
For-profit schools argue that the only way to meet President Barack Obama’s goal to add 16 million more college graduates to the economy by 2025 is for for-profit schools to be part of the equation.
"This works against that effort in a dramatic fashion," said Russ Natoce, chief marketing officer for Denver- based Westwood College, which has 17,000 online and on-campus students.
The 8 percent would be based on median debt loads for each college’s program with a 10-year repayment plan and median salaries within a field, defined by the U.S. Bureau of Labor.
Under the proposed rules, a new graduate with $32,653 in debt — the median debt for a for-profit grad in 2007-08 — would need to make $56,366 a year to meet the debt-to-income threshold average, according to Mark Kantrowitz, a leading expert on financial aid, who has written about the proposed rules.
"They did some back-of-the-envelope calculations that lead to standards that are just too harsh," said Kantrowitz, publisher of FinAid.org and FastWeb.com.
However, he added, "the framework is a good one. The idea of having a debt-to-income-ratio and having a loan-repayment rate is good."
For-profit institutions also say the debt ceiling — a rule that would largely apply just to for-profit schools — is an unfair attempt at controlling costs in a private industry.
"I think there may be a hidden motivation of price controls," said Pond at Colorado Technical University. "It’s like, how can we force higher education to charge less tuition than they charge now?"
Under the proposed rules, only a few nonprofit programs would fall under the rules — short-term training programs, like those offering culinary or arts certificates.
Critics of the plan say that is unfair: It isn’t just for-profit students taking on large debt to pay for college. Students graduating from private nonprofit schools had an average debt load of $22,375 in the 2007-08 school year.
"I don’t think the department gets to say we’re OK with you being a philosophy major at a fancy school, but you can’t pursue a business degree somewhere else," said Trace Urdan, a for-profit college industry analyst at Signal Hill.
Federal officials pushing the rule acknowledge the 8 percent cap is a first run within the negotiated rulemaking process and, with input, the proposal could change this summer.
But the notion of legally limiting student debt load is something Undersecretary Shireman said he is committed to after hearing reports of students who felt they were misled when told they would make big salaries after graduating and could easily pay off large debts.
"We want to make sure there are some boundaries in programs with federal financial aid and that consumers have the best information possible about their position," Shireman said. "We are open to input about what the right boundary would be."
Burdened with $50,000 debt
Any Chacon, 25, came from Mexico six years ago and worked cleaning buildings before enrolling at Westwood College to get a criminal justice degree.
She graduated in December and found a job as an advocate helping women who are dealing with domestic violence. Chacon makes $16 an hour and owes about $50,000 to Westwood in student debt.
"Of course, it’s a lot of money, and it’s something I don’t want to pay, but I think it’s every person’s responsibility," said Chacon, who lives in Commerce City. "Nobody forces you to sign anything."
If people like Chacon are willing to take on the debt knowing what lies ahead, that should be enough, Urdan says. Rather than put a ceiling on what students can take out in loans, Urdan favors "brutal disclosures" to students about what kind of debt they’re taking on and what their payments will be.
"I’ll grant you there are many cases of students not aware as they should be on what they’re doing," Urdan said. "Frankly, as an investor, that would harm the stocks, but students need to know exactly what their loan payments are going to look like."
Should the Department of Education adopt the rules, the landscape would change at for-profit institutions. School representatives say they may require students enroll with a little money in hand or participate in work-study programs.
Some expensive-to-run programs, like engineering or criminal justice, may go away.
"We continue to focus on the student; we’re innovative in that approach," Natoce said.
"Whatever the rules are in the future, we’ll still be innovative in our approach."