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Obama Is Cracking Down on For-Profit Colleges—And Liberals Should Applaud Him for It

Getty Images News/Justin Sullivan

The Department of Education released the final draft of its proposed rule on Friday to ensure that for-profit colleges offer post-graduation employment opportunities for their students that leave them capable of paying back their student loans. The rule, known as the “gainful employment” regulation, represents the culmination of a three-year fight with the industry, which successfully challenged a previous version of the rules in court.

The administration believes that the new regulation, which will first go through a 60-day public comment period, can now withstand a court challenge. And that's a good thing once you understand what the changes will do and why they're necessary.

Students at for-profit colleges drop out at an alarming rate and those that do graduate have much higher levels of debt than students in public and private non-profit colleges. For-profits also receive a substantial share of their revenue—more than 80 percent to be exact—from loans and grants from the federal government. In 2012, the Senate Health, Education, Labor and Pensions Committee, led by Senator Tom Harkin, completed a two-year report into for-profit universities to investigate whether this taxpayer money was being well spent. Across the board, degrees and certificates from for-profit colleges cost significantly more than those from non-profits:

Costs of For-Profit Colleges
Senate HELP Committee Report

Those extra costs are not leading to high graduation rates though. Fifty four percent of students who enrolled during the 2008-2009 school year had withdrawn from the institution by 2010. Only 18 percent had earned their degree or certificate. But students who attend for-profit colleges often leave them with significant debt. In the three years after they leave school, they default much more often than students from public and private colleges:

College default rate by sector
Senate Help Committee Report

It’s unfair to dump the blame entirely on the for-profit colleges. The Association of Private Sector Colleges and Universities (APSCU) argues that for-profits serve students who are not served by traditional private and public colleges. Those students often need sizeable loans and are more likely to withdraw from school than students in public and private non-profit colleges.

“It’s not rocket science that if you take someone who is really on the edge financially, is barely making it work and then you give them $40,000 in loans—it’s no surprise that that student is going to have a more difficult time paying it off, regardless of the quality of the program,” said Kevin Kinser, a professor studying non-traditional education at SUNY Albany. “Part of the difficulty with the for-profits is that they are very good at providing access and getting students in and getting students to think about college as a way to better their lives.

“But it does come at a cost,” he added. “The problem is that there are a lot of students who enter into these programs who don’t graduate, but they leave with quite a bit of debt anyway.”

But for-profits have also engaged in some pretty ghastly behavior. For instance, Corinthian College blatantly lied to prospective students about their graduates’ employment opportunities. It settled a lawsuit with California in 2007 for $6.5 million, but did not admit any wrongdoing, allowing them to continue to receive federal dollars. The Senate investigation found that deceptive recruiting practices were “widespread” throughout the industry.

The industry also has seen huge growth in recent years that has led to growing profit margins and fat wallets for presidents of those schools. The average compensation of CEOs of publicly traded for-profit colleges in 2009 was more than $7 million, according to the Senate report. At non-profit colleges and universities throughout the country, the five highest paid leaders received an average of $3 million. Meanwhile, for-profits spent more on marketing and recruiting ($4.2 billion) than on instruction ($3.2 billion).

Given the recent growth in the industry, APSCU was not happy with the proposed rule. “It is clear that the department was never interested in constructive input or ensuring that student access is protected,” Steve Gunderson, a former Wisconsin congressman and the current president of APSCU, said in conference call on Friday. He called the administration’s proposed regulation “an ideological declaration of war” on for-profit colleges, but did not know if they would challenge the regulation again in court.

In 2011, the Obama administration’s first attempt at “gainful employment” could not pass a court challenge. The original rule evaluated for-profits on two major criteria:

1. Thirty five percent or more of a school’s graduates must be repaying their loans.

2. The estimated loan payment must be less than 12 percent of a student’s total income and 30 percent of his or her discretionary income.

A judge ruled that the 35 percent threshold was arbitrary and struck it down. However, he ruled that the second provision, the debt-to-earnings ratio, was legal, because it was based on expert studies and industry practices. But because the two roles were intertwined with each other, he threw out the entire regulation.

The new regulation keeps the debt-to-earnings ratio test and replaces the loan repayment test with a loan default rate. Less than 30 percent of a program’s graduates can be in default. If a program fails the debt-to-earnings test in any two out of three consecutive years or if it fails the loan default rate test for any three consecutive years, it becomes ineligible to receive federal grants and scholarships. Since federal dollars make up such a significant percentage of for-profits’ revenue, ineligibility is a death sentence.

The administration is not looking to end eligibility for these programs. (It estimates that 24 percent of the 8,000 institutions that would be affected would fail one of the tests this year.) The goal is to give these programs skin in the game so that they have an economic incentive to set their graduates up for success.

“We really want to ensure that the focus is on improving programs. Those programs that are ineligible that are performing below the minimum standards now – our goal is really not to close those programs,” said James Kvaal, deputy director of the White House’s Domestic Policy Council. “Our goal is to improve those programs. We’ve tried to make sure that this rule is designed with that in mind."

APSCU's argument that they serve non-traditional students is certainly true, but for-profit colleges have clearly become an easy way for Wall Street to make money in recent years. In 2009, publicly traded for-profits had an average profit margin of 19.7 percent and generated a total of $3.2 billion in pre-tax profit. Most of that money is coming straight from the federal government. If it were used to set students up to succeed, then it would be money well spent. But it's clear that for-profits are not living up to that standard. They're spending more resources trying to recruit students so they can capture federal dollars and less money offering them a valuable education. This regulation is designed to crack down on the worst offenders. If that means students will lose access to some scholarships and opportunities at those schools, as APSCU warns, that's not a bad thing.