The federal government is proposing to cut financial aid for some students in the fastest-growing sector of higher education — for-profit colleges and universities — saying they put students on a fast track to failure.
The schools are fighting back, arguing the proposal would hurt the neediest students.
"This is really redlining," said Kevin Modany, CEO of ITT Educational Services, which has programs in 38 states, including Texas. "The data clearly demonstrates a disproportionate impact on minorities, nontraditional students, older Americans."
The proposal would limit financial aid and student loans for programs where fewer than 35 percent of graduates repay their loans.
It would apply to students in programs run by for-profit schools — many of them publicly traded, including ITT Technical Institute, Everest Institute, Westwood College and the University of Phoenix — as well as community college programs that don’t lead to a two-year degree, including many job training programs.
Both sectors attract many minority and low-income students, including those who are the first in their families to attend college.
But virtually all of the programs at risk of losing federal funding are run by for-profit schools.
"Hopefully we’ll see fewer schools charging a lot of money for truly worthless degrees," said Pauline Abernathy, vice president of the Institute for College Access and Success. "We don’t need people taking on high debt loads for minimum wage jobs."
She and others say the schools could comply by charging less and doing a better job of delivering training.
The so-called "gainful employment" rule is among several proposed by the Department of Education to increase oversight, but it has drawn much more attention than the others.
The public comment period ends Thursday, and a final decision is expected this fall.
Harris Miller, president of the Career College Association, which represents for-profit schools, estimated that as many as 300,000 students could be affected.
"It’s going to throw several hundred thousand students out on the street without any justification that that’s good for students or good for taxpayers," he said.
For-profit schools offer programs in fields as diverse as auto repair and interior design. Nursing, information technology and business are other popular programs.
They generally charge thousands of dollars more than public community colleges and four-year schools, and at some schools, almost 90 percent of that is covered by federal financial aid and student loans.
Many of their customers are minorities and first-generation college students, drawn to the schools by flexible scheduling, open admission and, according to recent government investigations, hard-ball recruiting tactics.
Enrollment is growing faster than at other types of colleges, but the schools are facing tough questions about whether they are a good deal for students and for taxpayers.
That’s because their students are more likely to borrow money to pay for school than those at public and private, nonprofit schools, and they take out bigger loans.
They also are more likely to default.
An analysis of Department of Education data by the Institute for College Access & Success, using rules that will take effect in 2011, found that for-profit schools accounted for just 7 percent of student borrowers but 44 percent of loans that had gone into default within three years.
Modany and other advocates offer their own studies, suggesting that their students’ default rates are similar to those of other students in the same demographic groups.
More than 70 percent of students at for-profit schools are eligible for Pell grants, the main federal financial aid program for low-income students, Miller said.
"If you don’t have a rich mommy or daddy to back you up in a pinch, there’s going to be higher default rate," he said.
Not far enough?
Essentially, the new rule would cut off federal money for students in programs where fewer than 35 percent of former students are on-track to pay back their loans and whose graduates have student loan payments exceed 30 percent of their discretionary income and 12 percent of their total income.
Abernathy argues the proposal doesn’t go far enough.
"We’re concerned the standards are just too low to protect students and taxpayers adequately," she said.
"From a common sense perspective, a majority of students should be able to pay down their loans."
Miller acknowledges that congressional hearings and other investigations have turned up embarrassing revelations about for-profit schools over the past year, including high-pressure recruiting.
"It’s been disturbing," he said.
But he said suggestions that the for-profit schools could lower their default rates by cutting tuition amounts to price-fixing and could lead to a legal challenge if the rule is imposed.
Modany declined to say how the rule would affect ITT, although he noted that stock prices are down since the proposal was announced. That’s true for most of the for-profit sector.
"It’s a game-changing scenario," he said of the rule change.
Maybe, but Abernathy said it is no silver bullet.
"We need to do a range of different things to ensure that when students are pursuing higher education, they are going to be better off and not worse off," she said. "To ensure that taxpayers aren’t subsidizing schools that aren’t overpromising and under-delivering."