For-Profit Schools Face New Debt Rules

Taking out federal student loans to help pay for a college education may soon become less risky.

The Department of Education this week proposed new rules that would require for-profit colleges and universities to keep the amount of loan debt that their students incur to a minimum and not outweigh the salaries they earn once they graduate. In effect, schools would have to make sure that students aren’t taking on too much loan debt either by lowering the cost of tuition, warning students of risks associated with loans, or improving their curriculum to help students land a job post-graduation with a salary large enough to help pay down the debt.

During the past two years, for-profit colleges have come under increasing pressure from consumer advocates and Congress members for their drop-out levels and loan default rates. They argue that many students at for-profit institutions end up racking up too much loan debt that they’re unable to repay either because their job after graduation doesn’t have a high enough salary to meet those costs or because they drop out of school.

Federal loans are more common at for-profit colleges. During the 2008-09 academic year, 88% of students at for-profit schools used federal loans, compared with 55% and 42% at four-year nonprofit private and public colleges, respectively, according to the latest data from the National Consumer Law Center. On average, graduating students at for-profit institutions carried $33,050 in student loans and debt, compared with $27,650 and $20,200 at nonprofit private and public colleges, respectively.

These proposed rules represent an effort to clarify the Higher Education Amendments of 1992, in which Congress mandated that colleges receiving federal loans and grant assistance must prepare students for “gainful employment” but did not define that term. The rules would force colleges receiving aid to better prepare their students to land a job, which in turn could help them repay their loans.

“Employment is only considered gainful when you can afford to repay the debt you incurred to get the education,” says Mark Kantrowitz, publisher of and, which have been tracking the proposals.

The final version of the regulation is expected to be set by Nov. 1, although revisions could be made before then. They would go into effect July 1, 2011. In addition to impacting for-profit colleges, they’ll also apply to non-degree certificate programs at traditional non-profit colleges.

The proposed new standards
Under the Education Department’s proposal, for-profit schools would have to meet the following three standards to continue to be eligible to receive federal student aid.

First, the proposal would mandate that at least 35%, and preferably 45%, of borrowers (including graduates and dropouts) who attended the school within the last four years are making payments on the principal of their loans.

Second, the monthly payments of the three most recent years of graduates would not be allowed to exceed 12%, and preferably 8%, of their average monthly income.

Third, graduates’ annual loan payments would have to remain under 30%, and preferably under 20%, of their annual discretionary income, which is defined as the difference between their average annual earnings and 150% of the federal poverty line for a single person.

Most of these requirements are less strict than when they were first introduced a few months ago, says an Education Department spokeswoman.

The impact on schools
Schools that satisfy the preferred threshold of at least one of the standards above would continue to be eligible for aid. Schools that only meet only the looser threshold on all three measures would have to receive employer certifications verifying that their program can produce valuable new employees; these schools would also have limited student enrollment and would have to inform students that they may encounter difficulty repaying their loans.

Schools that don’t pass the looser thresholds on any of the metrics would lose eligibility for federal aid. At that point, they would not be able to offer federal aid to new students, and enrolled students would receive aid only for the remainder of the academic year, plus one more year in order to complete their program.

The Education Department estimates about 5% of the programs overall and about 16% of the programs in the for-profit sector could lose their loan eligibility.

“There will be potentially significant consequences and we don’t know what the exact impact will be,” says Terry Hartle, senior vice president at the American Council on Education, a trade association representing nonprofit and for-profit colleges. “I don’t think it’s a good idea to fire off a machine gun without knowing what you’re going to hit.” Schools could apply for private loans, but the credit markets remain tight and many students are considered risky borrowers, he says.

For-profit schools say the proposed rules could leave students at a disadvantage. “We remain concerned that access to certain programs could be denied to the very students who have chosen that course of study as a way to advance their careers and improve their livelihoods in these difficult economic times,” says a Kaplan spokesman. (Kaplan owns Kaplan University.)

A spokesman at Apollo Group, which owns the University of Phoenix, says the school is reviewing the provisions and supports efforts to enhance accountability within higher education. “Apollo cautions against policy with the potential for unintended consequences that could restrict educational access, limit students’ choices or unfairly disadvantage hundreds of thousands of historically underserved students,” Apollo said in statement.
The impact on students

In order to meet the standards, most schools would have to improve the quality of their education, lower the cost of attendance, or both, says Kantrowitz. These options would likely improve students’ financial standing because they would graduate with less student loan debt or with improved qualifications to land a better-paying job.

Programs that still don’t meet the standards would have to shut down completely. Of the students whose programs lose eligibility, 10% are projected to drop out, says Kantrowitz.

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