Feds Propose New Rules for For-Profit Colleges

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The U.S. Education Department today released its proposed rules on standards for for-profit colleges to participate in federal student aid programs, setting its definition of “gainful employment” as jobs that required no more than 8 percent of a borrower’s gross income to repay his or her loans.

A minimum standard for participating in the loan programs is that they offer students preparation for “gainful employment.”

At the same time, the department set an alternative standard of 20 percent of discretionary income, and added overall repayment standards as conditions of participation – requiring 45 percent of prior students to be actively repaying loan obligations for eligibility.

Although representatives for the for-profit colleges immediately criticized the proposals, stock market prices for several of the commercial enterprises rose in what analysts said was relief over the standards.

The department originally had proposed only the 8 percent standard. The rules proposed today would allow for-profit colleges to be put in restricted status – something between eligible and ineligible – which would limit their growth but allow participation along with warnings to students about acquiring too much debt.

About 5 percent of current for-profit colleges would  be ineligible to participate in federal student loan programs if the proposals are adopted as they are, the department said. About 55 percent of all prior recipients of federal student aid to attend for-profit colleges are currently repaying their loans, but the new rules will determine eligibility based on an individual institution’s repayment rate.

To participate in the federal loan programs, for-profit institutions must show that they receive no more than 90 percent of their income from students who use the loans and that at least 10 percent of their enrolled students pay their tuition and fees on their own. According to the department, five of the largest for-profit colleges received 77 percent of their income from federal student aid funds. 

The Career College Association, which represents many for-profit colleges, called the proposed rules “unwise, unnecessary, unproven and … likely to harm students, employers, institutions and taxpayers.” It also alleged the department did not have the authority to make the changes.

In its release announcing the rules, the department noted that “Congress specifically authorized the department to set different rules for occupational training and for-profit colleges.”

On the other hand,  Rep. Tom Harkin (D-Iowa), who has been investigating for-profit colleges, said in a press statement that the regulations may not be strict enough.

“At first glance, the regulation appears to set a low bar. If we are allowing a school to continue to walk away with taxpayer dollars, despite the fact that less than a third of its students are able to repay their loans, that would seem to be a case of shockingly low expectations,” Harkin said.

The Institute on College Access and Success, which like Harkin praised the department for addressing the debt problems, sided with Harkin in assessing the severity of the regulations.

“… The rule needs to be strengthened to adequately protect students and taxpayers,” the institute said in a statement. “We are particularly concerned that programs could continue to profit from federal student aid when more than half of their students with loans can’t afford to pay down the principal.  In the next year alone, taxpayers will underwrite more than $30 billion in federal loans to students attending programs required to prepare them for gainful employment.”

The department had been expected to set the new rules in June, but it announced several others changes without addressing the “gainful employment” standard.  There is a 45-day comment period for the proposed rules; final rules are set to be announced on Nov. 1, the department said. They will become effective next summer.

According to federal statistics, the average associate degree graduate of a for-profit college has $14,000 in federal student loan debt, about twice that of graduates of nonprofit colleges.

A study by the Institute on College Access and Success’ Project on Student Debt found that almost one in four of all 2008 graduates from for-profit colleges owed at least $40,000 in student loans, compared with just 6 percent of graduates from public, four-year colleges and 15 percent from private four-year colleges.

It also found that students who attended four-profit four-year colleges were twice as likely to default on their loans as those from other four-year colleges.

Partly because of the demands for additional education sparked by the recession, for-profit colleges are the fastest growing portion of higher education.  The proposed rules state that their enrollment tripled between 2000 and 2008, to 1.8 million students.

The proposed rules also note that the Government Accountability Office has found that occupation-specific colleges that are not based on a strong basic education made graduates less versatile and limited their prospects for employment.  The GAO also said there was often an oversupply of people trained by for-profit colleges in fields with few job prospects. 

Harkin and others in Congress have raised many questions about the colleges, including how they calculate “credit hours,” the standard measure for setting tuitions costs, and their recruitment methods and practices.

The proposal rules, which are to be published in the Federal Register on Monday, can be found here.

Previous coverage on this topic: The Next Great Collapse?

 Rules Aim at For-Profit Colleges