Reforms Aim at For-profit Colleges

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The proposition can seem fair or outrageous: If the federal government, in effect, pays a college to train young people for careers, but too many of them can’t earn enough money in those careers to pay off their college loans, then the government stops paying.

So controversial is that idea that when the U.S. Department of Education proposed new rules last month to add strict new regulations for for-profit colleges and college loan programs – which have been particularly attractive to disadvantaged and minority youth – it shelved that proposal for later this summer.

The proposals, along with two congressional hearings last month, are part of an emerging federal crackdown on the growing field of for-profit colleges, which have been praised for launching disadvantaged youth into careers and lambasted for saddling them with a lifetime of debt they cannot escape.

“A number of proprietary colleges really charge people money and don’t give them anything,” said Robert H. McCabe, executive director of the National Alliance of Community and Technical Colleges. “There are a lot of good ones, but there are a lot that are not.”

The changes should be particularly significant for poor, minority and self-supporting youth, who enroll in higher percentages at for-profit colleges and vocational education institutions than at standard nonprofit colleges. Regulation proponents say the proposals will protect young people, while the for-profits warn that the rules could deny many of those same young people a college education.

As “more students go into debt to finance their educations, it is critical that we ask what students and the taxpayers, as federal investors, are paying for,” House Education and Labor Committee Chairman George Miller (D-Calif.) said at the first of the hearings last month.

Among the proposed rules, which are subject to a public comment period:

• Eliminate bonuses to recruiters for securing student enrollment, by removing “safe harbors” in current laws that allow some such bonuses.

• Require the institutions to evaluate the validity of a student’s high school diploma, if there is reason to believe it is suspect.

• Define “credit hour” more specifically and establish procedures to determine whether an institution’s assignment of a credit hour is acceptable.

• Strengthen the Education Department’s authority to take action against institutions allegedly engaged in deceptive advertising, marketing and sales.

The Career College Association, which says it represents 1,800 private postsecondary institutions and has led the field’s response to the proposals, said it supports most of the reforms but opposes the proposal dealing with recruitment bonuses.

The real fight will be over a formula that is still being debated: “debt-to-income loads.”

The problem

In an opinion article for AOL News in April, U.S. Education Secretary Arne Duncan argued that reform of the for-profit higher education field is needed because “many former students of vocational programs have reported that they were enticed into programs that did not deliver. They reported that their programs fell far short of providing the education and training needed to be gainfully employed.” He cited media accounts of students who “received a shoddy education at vocational schools, [and] are now unable to find jobs and are saddled with huge student debts.”

Tuition at for-profit institutions tends to be several times that of public and nonprofit colleges and universities, and the average student debt is far higher as well: $32,650 for borrowers who earned bachelor’s degrees, according to the College Board, compared with $22,380 for similar students from private nonprofits and $17,700 for those from public four-year universities.

The two-year cohort student loan default rate among graduates of for-profits is 11 percent, compared with 3.8 percent among students attending nonprofit colleges and 5.9 percent among students attending public colleges.

Mark Kantrowitz, publisher of the FinAid and FastWeb websites and a student aid data analyst, estimates that 60 percent of the for-profit students’ default rate is based on demographics: the student population is less well-off financially to start with, for instance, making defaults more likely. He says 40 percent is attributable to other factors, such as institutionsal quality.

The Higher Education Act of 1965 requires that in order for students to get federal financial aid (such as Pell grants), proprietary and vocational colleges (with certain exceptions) must deliver training “to prepare students for gainful employment in a recognized occupation.” The act, however, does not define “gainful employment,” so last year the Education Department convened an expert panel to come up with a definition. The panel failed to reach an agreement, and the department said it would produce one.

The department’s initial formula would have essentially measured the debt-to-income ratio of a program’s graduates based on their expected earnings, using U.S. Department of Labor earnings estimates for occupations and a 10-year loan repayment plan. If most of the graduates’ loan payments exceeded 8 percent of their projected earnings over those 10 years, the program’s students would not be eligible for federal financial aid.

The plan would have greatly affected for-profits, whose students tend to rely more on federal aid. The Associated Press reported last year that the five biggest recipients of Pell grant funding are for-profit institutions. At some of the schools, two-thirds of the students receive this assistance. By comparison, just 7 percent of Harvard students get a Pell grant.

At the same time, bills before both houses of Congress would allow people who file for bankruptcy to be able to dismiss private bank loans, which are often used to pay for courses at for-profit colleges. The bill is designed for those who have loans they will never be able to repay fully.

Defending for-profits

In April, the Washington-based Career College Association (CCA) released a report estimating that under the 8 percent rule, nearly one-fifth of the 10,000 programs it surveyed would become ineligible for federal student aid and might therefore shut down.

The affected institutions could appeal on various grounds, such as by providing data that show that their graduates are actually earning more than the federal projections said they would.

The CCA objects to the 8 percent threshold on several grounds. It said in a letter to Duncan this spring that no data support the hypothesis that people with high debt-to-income ratios are less likely to repay their student loans. In fact, it argued, “graduates with higher debt?to?income ratios are more likely … to repay their student loans.”

The letter said the proposal would adversely affect stellar academic institutions, as well as “a few ‘bad actor’ programs or institutions,” displacing hundreds of thousands of students.

The association (now called the Association of Private Sector Colleges and Universities) said the Education Department could achieve its goals with various other measures, such as educating students about loans, basing their ability to pay on their likely income, having institutions provide wage and salary data for graduates, and using federally calculated average wage and salary information for the occupations students are preparing for.

How to give credit

Meanwhile, a House Education and Labor Committee hearing last month focused on one of the issues addressed by the Education Department’s proposed rule changes: What’s a credit hour?

The more credit that an institution assigns to a course, the more it can charge for that course. The federal government gives out grants at the rate of $613 per credit hour.

A report this spring by the Education Department’s Inspector General found that some accreditation agencies did not have established definitions of what constitutes a “credit hour.” The report focused on one case, in which an accreditation agency called the Higher Learning Commission of the North Central Association accredited American International University (AIU), an online college, despite finding serious discrepancies in the number of credit hours earned in a single course. AIU was granting nine credit hours for a five-week course, which the agency said was impossible to attain. (The school later reduced the credits.)

“As a student, when I sign up for a course at nine credits, that’s $5,517 in grants. If that course is worth three credits, that’s $1,839,” Miller, the committee chairman, said at the hearing. “All of a sudden, that unit becomes very important, because we are dealing with education for profit, and if that extra unit is repeated 10,000 times, that’s a lot of money.”

The definition of a credit hour has been based on a system that roughly determines that one hour in a classroom is worth two hours of homework or outside study, thus creating a traditional three-credit course. But that system does not apply to online classes, or even to many trade schools, where the learning is mostly hands-on, with little or no outside homework. Accrediting agencies are struggling to keep up with the new forms of learning.

The proposed federal rules are at http://www.ed.gov/news/student-aid-rules-protect-borrowers-and-taxpayers.

Elaine S. Povich and Erika Fitzpatrick contributed to this report.