April 15, 2013

Gainful Employment Rule for For-Profit Colleges: Eminently Fixable, Eminently Necessary


The U.S. Department of Education announced this morning that it will conduct new hearings and rulemaking proceedings on a range of higher education issues, including the contested “gainful employment” rule, which is aimed at curbing the abuses of predatory for-profit colleges.

Last month, a federal judge delivered his second blow in less than a year to the gainful employment rule. Judge Rudolph Contreras, of the U.S. District Court for the District of Columbia, upheld the Administration’s power to enact the rule, but, in a lawsuit brought by expensive lawyers hired by the powerful for-profit college industry, he found two defects and blocked the Administration from enforcing it.

Obama’s team, which has faced a relentless attack on the rule by industry lobbyists and has plenty else on its plate, might have been  tempted to put the whole matter aside. But it can’t afford to do so, as I believe the upcoming hearings will reaffirm. The gainful employment rule is critical to protecting the federal investment in our students and providing opportunities for a wide range of Americans to build careers. The rule, though not as strong as many higher education advocates wanted, is having a genuine and positive impact in curbing some of the worst abuses of the industry.  And, fortunately, there is a clear path to fixing the rule so it will pass muster in the courts.

Today a broad coalition of organizations representing students, educators, consumers, veterans, and civil rights interests, will send a letter to President Obama asking him to promptly issue a strengthened gainful employment rule.  I participated in creating and organizing the letter, and I hope the Administration will respond positively and promptly.

When the Obama Administration entered office, among the numerous challenges it faced was the for-profit college industry, which was growing extremely wealthy off taxpayer dollars, yet appeared to be providing exceptionally poor value for students. The sector is dominated by big companies — University of Phoenix, EDMC, Kaplan, etc. — that receive about 86 percent of their revenue from taxpayers. These schools have taken as much as $32 billion in federal financial aid in a single year, about 25 percent of all such aid.  That means all of us are paying for their ubiquitous advertisements, which promise students a better future, for their big CEO salaries, and for their high-priced lawyers and lobbyists.

Instead of implementing federal rules to ensure that taxpayer education dollars were spent wisely, the administration of George W. Bush had actually loosened restrictions, thereby unleashing a torrent of waste, fraud, and abuse. While there are some responsible companies providing quality programs, many for-profit colleges have been engaged in deceptive recruiting of veterans, single parents, immigrants, and others struggling to train for a decent-paying career. These deceptions, and phony reporting to government authorities, have masked that many for-profit colleges offer high-priced, low quality programs that leave students with worthless credits, without good jobs, and buried in student loan debt.

The results of this reckless joyride are clear: More than half of the students who enrolled in for-profit colleges in a recent year dropped out within about four months, without a degree or certificate. For-profit colleges have 13 percent of the students, but 47 percent of student loan defaults. Twenty-three percent of their borrowers default on their loans within three years of graduating or dropping out.

The budget crisis we face, and the need to train more Americans for good careers in a tough economy, does not give us the luxury of wasting so many scarce education dollars on poor quality programs. Nor can we afford to exacerbate a student debt explosion — already exceeding one trillion dollars — that poses the kind of dangers we saw with the subprime mortgage crisis.

comprehensive report on the for-profit college industry released in 2012 (after the gainful employment rule was issued) by Tom Harkin (D-IA), chair of the Senate Health Education Labor and Pensions Committee, as well as numerous media investigations over the past three years, have shown how egregious the abuses by this industry have been — and that irresponsible predatory behavior is not confined to a few bad actors but instead is widespread across the industry.

The Harkin report also found multiple schemes by for-profit colleges to evade existing federal rules aimed at protecting students, like a rule that penalizes schools if too many of their students are defaulting on student loans. For-profit colleges were evading that particular rule by pressuring broke students to place their loans in “forbearance” status — default would be avoided, allowing the schools to keep federal cash pouring in, but the students would still have to pay back the loans and were no better off.

The gainful employment rule, issued in June 2011, was designed to implement a law, passed decades ago by Congress, requiring that career education programs receiving federal aid actually train students to earn a living. The new rule focused not on whether students had formally defaulted on their loans, but rather on whether they were earning enough money to be able to actively pay their loans back. As eventually watered down by the Obama Administration under industry pressure, the rule removes a career training program, whether at a for-profit, non-profit, or state school, from federal aid eligibility only if it fails all three of these tests three years in a row:

(1) at least 35 percent of former students are repaying their loans (defined as reducing the loan balance by at least $1);

(2) the estimated annual loan payment of a typical graduate does not exceed 30 percent of his or her discretionary income;

(3) the estimated annual loan payment of a typical graduate does not exceed 12 percent of his or her total earnings.

These tests seem ridiculously lenient — if two-thirds of your former students can’t pay back their loans, should taxpayers keep funding your “career” college? So, not surprisingly, many higher education advocates denounced this final formulation of the rule as a sellout to industry. But at least some of us were willing to give the rule a chance, believing that, in concert with other measures to curb this industry, the gainful employment regulations might make a difference.

Data released by the U.S. Department of Education Department last year under a test run of the gainful employment rule show that the rule, once implemented, could have some real bite: 65 percent of the programs failed at least one of the three minimal tests aimed at protecting students, and five percent–193 programs at 93 different for-profit colleges–failed all three tests.

And, in fact, the rules appear to have now played a role in pressuring some for-profit colleges to moderate their bad behavior — shutting down some of their worst programs, curbing their ever-escalating tuition charges (including at perennial over-chargers University of Phoenix, EDMC, and Bridgepoint), declining to admit some students who have little chance of succeeding in a given program, and offering students trial periods before finally depositing their government aid checks.

The pressure on for-profit colleges to improve their behavior is enhanced because of the presence of the federal 90/10 rule, which requires these schools to obtain at least 10 percent of their revenue from sources other than Department of Education-managed financial aid — on the theory that schools that cannot get anyone to pay out of their own pockets are not worth propping up. Gainful employment presses colleges to curb their sky-high tuitions, lest too many students end up with insurmountable debt. Yet lower prices means that federal aid can cover a higher percentage of tuition and other costs, creating 90/10 problems. This puts the for-profits, as structured today, in a tight squeeze, but it’s an appropriate squeeze — their prices should be lower, and their programs also should improve in quality, so more students can pay back their loans, and more students, employers, and outside scholarship programs will be willing to spend their money to pay for tuition.

Numerous statements by Wall Street analysts and by industry executives themselves suggest that concern about the gainful employment (GE) rule taking effect has been making it tougher for for-profit colleges to act with impunity. For example:

An SEC filing by the for-profit giant ITT Tech, Feb. 2012:

The GE Requirements have resulted in, and will likely continue to result in, significant changes to the programs of study that we offer, in order to comply with the requirements or to avoid the uncertainty associated with such compliance, such as offering programs at lower costs or in fields with higher earnings potential. The GE Requirements have and will continue to put downward pressure on tuition prices, so that students do not incur debt that exceeds the levels required for a program to remain eligible under Title IV Programs. This could, in turn, increase the percentage of our revenue that is derived from Title IV Programs and, therefore, adversely impact our compliance with the 90/10 Rule. We have also begun to limit enrollment in certain programs of study and substantially increase our efforts to promote student loan repayment.

Barclays U.S. Education Services, “Another Challenging Quarter in the Books,” Aug. 2012:

Over the past eighteen months, many of our covered [for-profit college] companies have made substantial changes to their offerings in an attempt to position better for the changing regulatory environment. This has included teaching out programs, introducing new program offerings, changing tuition, reducing the duration of programs, and even more dramatic steps including the closure of poorly performing campuses…. As companies weigh their options, we expect further changes ahead in the form of adjustments to tuition and program durations, enrollment caps, and program/campus closures.

PiperJaffray Investment Research, “Where We Stand on the Education Stocks: Education Industry Benchmark Analysis” March 2013:

Most industry participants have already implemented steps to improve GE compliance….

There is also evidence that for-profit colleges have been exploring ways to evade the requirements of the gainful employment rule, but that information argues for tightening up the rule and carefully monitoring compliance, rather than abandoning the approach.

The concepts in the gainful employment rule are catching on in efforts to hold for-profit colleges accountable. For example, New York City Comptroller John Liu and the his city’s pension funds recently submitted shareholder proposals to big for-profits DeVry and Career Education Corp. requiring those companies to disclose student debt-to-income ratios and loan repayment rates. (The SEC rejected Career Education’s effort to block the proposal.)

If the gainful employment rule is helping to eliminate some of the worst excesses of the for-profit college sector, those that have truly been ruining students’ lives, can it go further and actually force the industry to offer programs that are reasonably priced and actually train students for careers? I think that will take some time. For many current programs in the sector, higher retention and graduation rates right now would not necessarily be a good thing — if a program is high-priced and low-quality, finishing it may actually make a student worse off. A June 2012 paper from the National Bureau of Economic Research, authored by Professor Kevin Lang and Russell Weinstein, both of Boston University’s Department of Economics, found:

 Among those entering associates degree programs, there are large, statistically significant benefits from obtaining certificates/degrees from public and not-for-profit but not from for-profit institutions…. Even after controlling for an extensive set of background variables, students at for-profit institutions do not benefit more and often benefit less from their education than apparently similar students at not-for-profit and public institutions.

As this study suggests, degrees from many of today’s for-profit colleges are often a waste of money because they don’t help students to get jobs — the instruction and training is weak, job placement efforts are weak, and the schools’ reputations are poor and thus the degrees are not respected in the labor market. Another study by Harvard economics professors Lawrence Katz and Claudia Goldin found that students who attend for-profit colleges have higher unemployment rates and lower earnings than do comparable students from other types of colleges.

But the gainful employment rule, when combined with other federal rules and efforts to crack down on deceptive and coercive recruiting could, in a few years, force the major for-profit colleges to fundamentally change their business model and compete to do what they should have been doing all along — help students to learn skills and build careers. Some of the current CEOs may have to depart, and some of the big companies may have to shut their doors, in favor of leaders and institutions that are genuinely willing and able to deliver quality education programs.

However, all of this potential progress in reshaping the for-profit college industry would be imperiled if the Administration dropped gainful employment. The evidence suggests that the current industry giants are not ready to fundamentally change and will only do so under pressure.  Even today, as broader public awareness of industry abuses has helped produce declining enrollments, revenues, and stock prices, the industry continues to spend much of its earnings on misleading advertising aimed at students, as well as lobbying and lawyering to avoid accountability. After a decade of entitlement and unblocked access to federal riches, it seems that some arrogant for-profit college owners are not giving up their luxurious way of life without a fight.

Fortunately, they won’t succeed if the Obama Administration moves ahead purposefully. The gainful employment rule can clearly be revised to address Judge Contreras’s objections.

Judge Contreras ruled that the Administration had the authority, and clear justification, to issue the rule: “The Department has set out to address a serious policy problem, regulating pursuant to a reasonable interpretation of its statutory authority….Concerned about inadequate programs and unscrupulous institutions, the Department has gone looking for rats in ratholes — as the statute empowers it to do.” But the judge found that the Administration had failed to offer a clear rationale for one of the rule’s three threshold tests — the requirement that at least 35 percent of former students are repaying their loans. As suggested above, I would say that the “are you kidding me?” rationale should be enough for that threshold; if, for three years in a row, 66 percent of a career education program’s former students can’t pay down their loans, isn’t it manifest that the program is harmful? But more rigorous analysis leads to the same conclusion: There are a number of sound bases in federal law and education data for determining that a 35 percent repayment threshold is fully warranted as a means of protecting students (and, indeed, that a threshold higher than 35 percent would be justified).

The judge also determined that the Department of Education did not have authority to collect information in the way it proposed, for purposes of the two gainful employment debt to income tests, on students who do not receive federal financial aid. But that problem can be fixed by measuring only the debt outcomes of students who do obtain student loans. (At community colleges, because of low tuition, only a small percentage of students obtain loans. To address the problem of distorted data resulting from such small samples, the rule could deem any program in which a majority of the graduates do not take out loans to have automatically passed both debt to income tests.) Removing from the calculations the tiny percentage of for-profit college students who do not take out loans would not require that the debt test ratios be weakened, because they already were too weak to fully protect students.

Indeed, there is a strong argument for the Administration to considerably strengthen the gainful employment regulation in a new rulemaking proceeding. The Harkin report and other subsequent investigations have exposed the depth of misconduct and cynicism of this industry, as well as the severe harms caused to students who have seen their bank accounts depleted and their dreams crushed. Staff members who have complained about rampant fraud at their institutions have been punished and fired for standing up for students. And for-profit college CEOs have raised their own salaries as much as seven-fold, essentially looting their own institutions, even as share prices have fallen dramatically. After several years of writing and advocating on these issues, I am almost daily contacted by former students, faculty, and staff who have offered harrowing, heartbreaking tales of abuses and lies at for-profit colleges, some of which I have published and others that await public telling until authorities have completed investigations.

Certainly there was no obligation for the Administration to devise three different measures of gainful employment failure, and then allow programs to remain eligible for federal aid as long as they didn’t fail all three tests, three years in a row — nine strikes and you’re out, as it were. A revised rule could, for example, require programs to pass two out of three tests each year, instead of just one of out of three over three years.

The Obama Administration should take heart not only because a revised rule is warranted, but also because the revelations of abuses across the for-profit college sector have helped reshape the political landscape. When the rule was issued, eleven state attorneys general had come together to coordinate their investigations of fraud and abuse in the industry; today, a bipartisan group of 32 state attorneys general are united in that effort. In the past, campaign contributions from for-profit colleges, and expensive lobbyists, prominent Democrats as well Republicans, were able to sway lawmakers to oppose or express doubts about the Obama reforms. Today, a broad group of Senate Democrats is standing with Senator Harkin in demanding that the industry be held accountable, and even stalwart Republican Senator Marco Rubio (FL) has proposed reforms against industry opposition.

Where before, the for-profit lobbyists had been able to gain gestures of support from some members of the House Black, Hispanic, and Asian-Pacific caucuses, today there is strong momentum in all three caucuses for genuine changes to the industry. And while the House Republican leadership seems to remain firmly in the industry’s pocket, their members seem increasingly aware that there are political risks to backing wealthy for-profit college owners, when veterans, newspaper editorial writers, and others in their districts are paying close attention and demanding reforms.

Standing with our soldiers at Fort Stewart, Georgia, a year ago, President Obama signed an executive order aiming to protect U.S. troops, veterans, and their families from predatory abuses by for-profit colleges. The President charged that some for-profit education companies “aren’t interested in helping you…. They are interested in getting the money.” He called their conduct “appalling” and “disgraceful” and told the troops that these schools are “trying to swindle and hoodwink you.” He was absolutely right, and the moral urgency of his remarks demand that his Administration continue the essential, arduous work of protecting our students and taxpayers from predatory colleges and the mountains of student debt they take home as profits. That includes ensuring a strong gainful employment rule, one that implements an essential, common sense principle: Federal aid should only go to career education programs that effectively train students and help them build careers.

Republic Report and others will be watching to see, in particular, what prominent Democratic lobbyists want to repeat their roles as mercenaries in the effort to avoid accountability for for-profit colleges, now that President Obama’s Administration has made it clear that it remains strongly committed to reforming this reckless industry.

This article also appears on Huffington Post.