The Battle Over Increased Regulation of For-Profit Colleges

An overlooked yet fierce battle has been transpiring in America’s higher education industry. The battle is over federal financial aid to for-profit colleges. There are two primary issues in the dispute: first, what is an acceptable metric to determine if a for-profit college’s default rate is high enough to disqualify it from receiving federal financial aid; second, and more generally, are for-profit colleges providing a cost-effective option for students? Therefore, because of the importance of this issue, an overview is imperative.

First, I will examine the primary participants in the battle. The parties seeking increased oversight and regulation of the for-profit industry are primarily the Obama Administration and Senator Tom Harkin (D-IA). The Administration has sought to utilize the regulatory authority of the U.S. Department of Education to enact reform. Additionally, Senator Harkin has directed the congressional reform effort through his authority as Chairman of the U.S. Senate Subcommittee on Labor, Health and Human Services, Education, and Related Agencies.

Conversely, the plethora of participants in the for-profit college industry have opposed the reform efforts; e.g., the Association of Private Sector Colleges and Universities (APSCU), Kaplan Higher Education, and the Apollo Group which owns the University of Phoenix.

The catalyst of the battle was a 2008 law that changes the metric the Department of Education utilizes to determine default rates. The metric from the previous law, which is effective until 2014, utilized a method labeled the "two-year cohort default rate;" i.e., it tracks defaults from a group of borrowers who default within a two-year window after loans come due. The new metric utilizes three-year default rates. The new metric is contentious because federal law stipulates that if the default rate for a college exceeds 30 percent, then the college becomes ineligible to receive federal financial aid. Moreover, according to a preliminary report released in February by the Department of Education, the new metric would push many for-profit colleges above the threshold. Additionally, with the extra year added, the average default rate for the for-profit industry increased from 11.6 percent to 25 percent.

Kaplan Higher Education, a for-profit college corporation, responded to the preliminary report by stating: "These "informational" 3-year rates are not indicative of what actual 3-year cohort default rates will be under the new requirements. Until now, schools like ours have focused on complying with the 2-year default requirements. We have a variety of new initiatives under way that will help our schools meet the 3-year requirements. We believe that these changes will improve our default rates so that we are within the new regulatory standards when they become applicable." Responses from other for-profit colleges were similar to Kaplan’s response.

Conversely, Senator Harkin’s response was unequivocally negative. "These numbers paint a troubling picture of life for students after they leave a for-profit college, with one quarter of for-profit college students defaulting on their loans within three years of leaving school," he stated. "It is also clear from these default rates that students who attend for-profit colleges are dramatically worse off after they leave than students at private or public nonprofit schools. And with for-profit students amounting for almost half of all student loan defaults, serious questions have to be raised about the taxpayer investment in these companies."

In conjunction with the change in the default rate metric, the Department of Education is expected to increase its regulation of for-profit colleges. It released a proposal in October 2010 delineating the provisions. While the proposal would also apply to nonprofit private and public colleges, it is designed primarily to regulate the for-profit industry. The proposed provisions would increase consumer protection to ensure that only eligible students receive federal aid; additionally, the provisions would also clarify for which courses and programs students can use federal aid dollars. According to Secretary of Education Arne Duncan, "these new rules will help ensure that students are getting from schools what they pay for: solid preparation for a good job. A comprehensive list of the rules as delineated by the Department of Education will be posted succeeding this article.

Of the myriad provisions proposed by the Department of Education, the most controversial has been the new "gainful employment" provision. The new provision would require colleges to meet certain debt-to-income and student loan repayment criteria to qualify for federal financial aid. The Department has heretofore not released a finalized version of the "gainful employment" provision, but it is forthcoming.

The proposal has received strident opposition from for-profit colleges. In January the APSCU filed a federal lawsuit against three of the proposal’s provisions (state authorization of colleges, incentive compensation for recruiters, and misrepresentation of colleges’ programs and results).

Furthermore, the APSCU and for-profit college companies have waged an extensive media campaign to refute the claims made by opponents of for-profit colleges.

The battle has heretofore been fierce, and it is far from concluding. Furthermore, once the Department of Education releases a finalized version of the "gainful employment" provision, the battle will become more antagonistic and contentious. Make certain to check the Michigan Policy Network for updates.

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