by David Halperin
On Thursday, June 3, 2011 the Obama Administration issued its long-awaited “gainful employment” rule, aimed at pushing for-profit colleges and career training schools to stop ripping off students and taxpayers. Although there are good programs in the for-profit sector, many programs are high-priced and low-quality, and some programs, as we have learned from recent government and media investigations, appear to be little more than straight-up swindles: Recruit students to fill slots, collect the federal checks, leave the students without career skills or options. Repeat.
The dramatic rise of such schools over the past decade has left hundreds of thousands of students deep in debt. For-profit colleges now have about 10 percent of US students, 25 percent of federal financial aid, and nearly half of all student loan defaults. Many of these schools get 90 percent of their revenue from federal grants and loans. Left unchecked, this sector could produce a new subprime-like debt crisis.
The reaction to the new rule has been all over the place. Among representatives of for-profit schools, responses have ranged from “Congress must stop this rule” to “we’ll have to see what happens.” Groups who advocate holding these schools accountable (including Campus Progress), have issued statements with sentiments varying from “thanks Obama Administration!” to “thanks for nothing.”
Some insist that money talks and cite a rally in for-profit college stocks as proof that this is a critical victory for the industry.
I think the rule gives bad actors in the industry a few more years to do their worst. But their unrestrained orgy of waste, fraud, and abuse at taxpayer expense inevitably will come to an end.
It’s certainly true that the final rule is significantly weaker than the rule that the Administration proposed last summer (and even the standards of that original rule were too low). Under the final rule, a program can systematically fail to provide value to students and still be eligible for federal financial aid. Sixty-five percent of students from a program can fail to pay back their loans, and loan repayment from a school’s graduates can consume 30 percent of their disposable income, and the program will nevertheless remain eligible [PDF] for federal grants and loans.
In fact, a program would have to slip below those low standards three out of four years in order to lose eligibility. That’s pathetic. But amazingly, some of today's for-profit programs would likely fail those standards because they are so high-priced and so low-quality. The Department of Education says that five percent of for-profit programs will run afoul of this rule and lose their aid.
So even under these low standards, the very worst programs will eventually have to shut down. But also, crucially, a much larger pool of bad programs will have to improve their performance for fear of being part of this bottom five percent. Before, there was little incentive to do more than take students’ and taxpayers’ money. Now industry players know they will have to provide at least some value or lose the federal aid that keeps them alive. Also important is that the new rule will provide students and the public with critical information about the effectiveness of individual career college programs. The programs that will have the best reputations will be those that keep debts low and prepare people for jobs that really exist—exactly what students want. These changes could help millions of students.
So what has driven up the for-profit stocks, at least for now?
First, the market values certainty. Few people are giving this rule a big hug, which suggests that the Administration may have found the political center between the fact-based arguments of our coalition and the cynical position of the for-profits, who have spent tens of millions of dollars on a furious campaign of lobbying, litigation, advertising, and political contributions in an effort to maintain the status quo. The concessions made by the Administration are likely to make the rule harder to overturn in Congress. So the rule may well be the standard that guides the industry for a while.
Second, Wall Street is focused on short-term profits. Even more significant than the degraded quality standards of the final rule is the extended delay in making the rule effective—programs are not at risk of losing eligibility until 2015. So for-profit companies can hope that the 2012 election will bring a new President and Congress that will overturn the rule. Some bad actors also could adopt a strategy that, rather than seeking to comply with the rule, instead starts to loot the assets of their schools, cutting costs and quality even further, and going out in a blaze of glory until the rule catches up with them in 2015.
If the for-profit education business is ultimately compelled to reform, it will be because the gainful employment rule is just one part of a changed landscape. The Administration already has issued other rules aimed at curbing misinformation and over-aggressive recruiting practice by for-profits. Senator Tom Harkin continues to hold public hearings focused on misconduct by these schools. Eleven state attorneys general have joined together to investigate for-profit abuses. More and more students who have been misled and mistreated by these schools are speaking up and even going to court. And media investigations have exposed more bad practices in the industry and widespread abuses of students who need help the most–low-income people struggling to support families, students of color, and our veterans. Finally, there is now a strong coalition of civil rights, consumer, educator, and student groups, representing millions of Americans, that is determined to hold bad schools accountable and protect students and taxpayers.
Collectively, these developments will make it more and more difficult to sustain a business model based on deception, low investment in students, and skyrocketing prices. For-profit education companies will be forced to clean up their acts or shut their doors.
It would be a travesty if the for-profits now spend even more money—largely money that comes from taxpayers—on a continued pressure campaign to avoid accountability. But if the industry refuses to back down, Congress should act in the interests of fiscal responsibility, our economy, and especially our students, and resist efforts to roll back the new rules. Republicans and Democrats should support directing federal resources to programs that actually help students to learn, graduate, and succeed in the job market.
David is the Director of Campus Progress and a Senior Vice President at the Center for American Progress.
