Arne Duncan: For-Profit Schools Need to be 35 Percent Effective

Meanwhile, student advocates are disappointed that the new rules aren't stronger.

By Julianne Hing Jun 03, 2011

Late may be better than never, but is something always better than nothing? That’s what student advocates are left wondering now after the Department of Education released its final and long-awaited "gainful employment" rule aimed at regulating the for-profit school industry on Thursday.

After a ten-month delay triggered by the deluge of 90,000 public comments sent to the Department of Education over the much-contested regulation, the new rule, which carried with it the biggest implications for for-profit schools’ continued revenue streams, is significantly weaker than what student advocates had in mind.

The new rule is the last in a multi-year effort to reign in the for-profit schools industry, which is the the fastest growing sector of the higher education world. For-profit schools are responsible for 12 percent of the nation’s post-secondary school students, but those students are also taking out 26 percent of the nation’s student loans right now. For-profit school students also account for 43 percent of the nation’s student loan defaults. The statistics led the Obama administration to pass thirteen new updated rules in October to try to clean up the industry, but there was always one, which threatened a primary source of for-profit schools’ revenue, that remained unfinalized, until now.

Under the finalized rule, which goes into effect July 2012, for-profit schools and certificate programs at non-profit colleges and universities could become ineligible for their students’ federal student aid if they fail to meet a set of three tests three times within a four-year period: if at least 25 percent of former students are paying their loans (which the Department of Education defines as reducing their loan balance by at least $1); if a former student’s annual loan repayment is not more than 12 percent of her actual earnings or 30 percent more than her discretionary income. Put another way, for-profit schools only need to clear one of these hurdles in order to keep on pocketing their students’ financial aid and federal student loan money

"We’re asking companies that get up to 90 percent of their profits from taxpayer dollars to be at least 35 percent effective," Secretary of Education Arne Duncan said, of the new rules.

Still, student advocates have welcomed the new lenient and watered-down rule with weary relief.

"While the rule does not include many important protections urged by civil rights, student, women’s, labor and consumer organizations, it sends a strong message to many for-profit career education programs to start putting students first," said Nancy Zirkin, executive vice president of The Leadership Conference on Civil and Human Rights.

Zirkin said that regulating the for-profit schools industry was especially important because they tend to serve students who are poor, people of color, women or first-generation college goers.

"Regulation is urgently needed to hold these institutions accountable given the rising tide of debt and default rates faced by students enrolled in for-profit programs – a majority of whom are women, minorities, low-income individuals, veterans and service members. For-profit colleges are a viable option for many of these students, but that doesn’t give these businesses the right to exploit those they serve.

Indeed, students of color are disproportionately among those who enroll in for-profit schools, which have lured students in with false promises of future career prospects that haven’t materialized, often because the shadiest of for-profit schools’ programs are unaccredited or are poor training programs for the careers they’re supposed to send graduates into. And students of color are more likely to depend on financial aid to get through school, but also four times as likely as their peers to eventually default on their loans because they don’t have the family and social networks to help ease them through the lean early years, which are getting tougher and tougher to navigate these days for all graduates.

For for-profit schools, the problem was not just that they were sending students into a poor job market, it’s that schools were pocketing students’ federal aid money, even when they knew full well that they were sending many students into almost certain default. A Government Accountability Office investigation found last year that fifteen out of fifteen randomly chosen for-profit schools also engaged in some kind of fraud or deception in order to help students lie on financial aid forms in order to qualify for more federal student aid money–that they school would pocket and the student would be locked into repaying for a lifetime. It was what some education researchers called the subprime mortgage crisis again in the making.

But the industry spent millions on lobbying, and was able to sway key lawmakers of color to advocate against regulation of the industry. On Thursday, the industry was still cranky about the new lenient rules.

"We remain very concerned that the gainful employment regulation, while reflecting the fact that the Department has listened to the sector and made changes to its initial proposal, is still using the same ill-advised metric approach to this matter and is clearly outside of its statutory authority," the industry organization, the Association of Private Sector Colleges and Universities said in a statement. "Notwithstanding the changes, the real question is how the regulation will impact students, particularly non-traditional students served by our institutions."

"This year alone, taxpayers are expected to underwrite more than $30 billion in federal loans and more than $9 billion in Pell Grants to students attending for-profit career colleges," said Pauline Abernathy, the vice president of The Institute for College Access and Success, an education and student advocacy group. "However, the evidence is clear that many of these programs are fleecing both taxpayers and students."

"Unfortunately the final rule will allow many programs that over-charge and under-deliver to continue to receive federal student aid."

The stocks of most for-profit schools have taken deep hits in the last year as they await the gainful employment rule, but on the day it dropped, many corporations saw their stocks rally back with big gains. The sector, it seems, is still confident it can keep making money just fine with the new Department of Education rules, too.