Education Department To Punish Schools With Debt-Saddled Graduates

The U.S.Education Department (ED) announced long-awaited regulations today that will allow it to bar institutions with programs lasting less than two years (mainly for-profit schools), from receiving federal student aid if their students have, on average, unmanageable student debt levels for their income. This is a major step forward in the effort to ensure accountability for the for-profit education sector and fairness for students and taxpayers.

For-profit colleges have always been allowed to receive federal aid so long as they helped prepare students for “gainful employment.” In theory, it sounds great: Companies are able to bring a different kind of flexibility and management style to directly train people for certain occupations, like nursing, managing computer networks, or even building windmills and installing solar panels. In practice, many for-profit colleges have little to lose by focusing on aggressive recruitment—often without regard to the ability of students to benefit from the programs—and profit maximization, in the form of high tuition and financial aid practices that aimed to maximize all available federal resources and maximize private student loans.

They had much less of an incentive to actually focusing on maintaining programs that actually help their students find employment after graduation.

Part of the problem is that “gainful employment,” part of the definition of an eligible “proprietary institution of higher education,” has never actually had a definition until now. The new rules define “gainful employment” in a way that prohibits a for-profit college from receiving federal financial aid if its students, on average, owe more than 12% of their total income and 30% of their “discretionary” income in student loan payments, and fewer than 35% of its graduates are paying down the principle on their loans. Colleges that would face certain restrictions and be required to warn students of the high student debt-to-income ratios if they approach but do not exceed these cut-offs. The earliest a school could lose eligibility for federal aid would be the 2012-13 school year.

While these regulations are unprecedented and helpful, the Education Department’s regulations raise the debt to income cut-off to 12% from the 8% standard in its original proposal. This was a mistake—too many career college students graduate to find that their diplomas only lead to student debt, rather than “gainful employment.” 8% has generally been the figure used in the relevant literature to define the level of student debt that is manageable, and it should be the true test of whether it makes sense for taxpayers to invest in programs that claim to help prepare people for “gainful employment,” rather than “crushing debt.”

The regulations will do a great deal to weed out the worst actors, and alert students to problematic schools, however. ED estimates that, under the new rules:

…5 percent of all programs would no longer be eligible to offer their students federal student aid and 55 percent of all programs would be required to warn their students about high debt-to-earnings ratios.

Other regulations that were put on the books to protect students have been slowly watered down by industry lobbyists over the past decade. Sec. Duncan’s ED has really started turning the tide in the other direction, however. Here are a few other changes to how ED will regulate the for profit college industry (more detail is here):

• ED removed numerous exceptions (“safe harbors”) to a rule banning colleges from paying recruiters based on the number of students they enroll. Aggressive recruiting, which often leads to high-pressure and misleading sales pitches to potential students, has been a major issue in this industry. The University of Phoenix, for example, recently settled a lawsuit involving recruiter compensation with the federal government for $67.5 million after settling a similar suit with ED for $9.8 million in 2004.
• ED strengthened rules banning colleges from misrepresentation in recruitment and advertizing.
• ED will improve its oversight over "ability to benefit” tests. A recent Government Accountability Office report found that some colleges were helping students cheat or were otherwise subverting the test to increase their admissions pool. The test is designed to ensure that students without a high school diploma or GED are ready for college level work, and would be able to benefit from a higher education program.

Pedro de la Torre III is a former Advocacy Senior Associate at Campus Progress.