Some of the country’s largest online education programs will have to comply with federal regulations far less stringent than once thought after the U.S. Education Department (ED) unveiled its new rules for for-profit institutions that have come under fire for unscrupulous business practices.
The long-awaited rules aimed at for-profit schools such as the University of Phoenix and Kaplan University—first discussed in 2009—were released June 1. The regulations are meant to ensure that students aren’t graduating from for-profit colleges unqualified for the professional world and burdened with excessive student loan debt.
One-fourth of for-profit students default on their loans after three years, for-profit students account for almost half of all federal loan defaults, and graduation rates at those schools hover around 50 percent, according to national education statistics.
A college must fail all three of the government’s “performance requirements” in three out of four years before the institution can no longer receive federal loans, according to ED’s new regulations, which take effect in 2015.
For-profit institutions that have seen enrollments skyrocket in the past decade rely heavily on federally-backed student loans.
Public and nonprofit colleges are also subject to the federal “gainful employment” rules.
Advocates for far stricter rules laid out by ED officials last fall—and decried by for-profit lobbyists—said the Obama administration had missed its chance to crack down on an abusive industry that took in more than $20 billion in student loans in 2009.
“I feel like it’s an unconditional surrender to the [for-profit] industry,” said Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers (AACRAO). “This administration is putting on a brave face, but the fact is that they caved in. … I see it as a complete defeat for reform. This was a rout, and the industry won clear across the board.”
Pauline Abernathy, vice president of the Institute for College Access and Success, said the federal regulations were nothing more than a starting point for how the government should protect college students who attend for-profit colleges.
Abernathy said the “gainful employment” rule was “a first step in preventing federal taxpayer dollars from being wasted on career education programs that leave students with nothing but insurmountable debt.”
“Unfortunately the final rule will allow many programs that over-charge and under-deliver to continue to receive federal student aid,” she said.
Delaying implementation of the rules means it will “take longer to protect students and taxpayers from the worst of the worst programs,” Abernathy said.
Giving colleges a four-year window before ED’s three regulations take effect was necessary for institutions that will have to provide reams of new data proving federal compliance, said Andrew Magda, a senior analyst for Eduventures, a higher-education consulting service based in Boston.
“The department has realized that with what they are asking the schools to assemble and what they are asking government agencies to examine, a window of compliance was needed,” he said.
There are three new ED requirements for for-profit colleges to receive federal loan money:
- Students must be spending 12 percent or less of their total income on loan repayment after they’ve graduated.
- Graduates must be spending 30 percent or less of their discretionary income on loan repayment.
- Thirty-five percent of former students must be paying down their loans by at least one dollar every year.
The rules criticized by regulation advocates who hoped for more comprehensive reform were greeted with scorn from groups that have long opposed any regulations on for-profit institutions.
Harry Alford, CEO of The National Black Chamber of Commerce, called ED’s “gainful employment” rules a “draconian proposal aimed at killing career colleges” and called on ED Secretary Arne Duncan to suspend the rules while Congress has a chance to review the proposal.
“Congress must step in to create reform that is fair, effective, and a remedy for colleges across the board — not just the career college sector,” Alford said, adding that ED’s rules were illegal.
In a statement, the Association of Public Sector College and Universities (APSCU) criticized the government’s measurements for how for-profits must comply with the new regulations.
“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 statement said. “Our concern is that the regulation will still penalize programs with great outcomes while allowing under-performing programs to continue.”
ASPCU said officials there would review the rules before deciding its “next step.” The statement did not mention a lawsuit against ED.
Investors weren’t discouraged by the government’s new regulations. Shares in for-profit companies jumped upon news of the softened federal rules, with for-profit firms like Corinthian Colleges, DeVry, Apollo Group, and ITT Educational Services gaining upwards of 30 percent less than a day after ED unrolled its “gainful employment” rules.
“Stocks, I think no matter the industry, do not respond well to uncertainty and the announcement alleviated lifted most of that uncertainty,” Magda said. “I think the stocks rallied because the cloud of uncertainty was lifted with the announcement.”
The for-profit college stock market rally, Nassirian said, indicates just how lenient ED’s regulations had become after intensive lobbying on Capitol Hill.
“That tells you the enormity of what happened,” he said. “It clearly indicates that people with real money at stake are betting that the industry’s practices will go on unchecked.”
Nassirian said ED officials should have been better prepared to withstand the massive, two-year lobbying campaign unleashed by the for-profit industry after Duncan and President Obama first said they would push for tighter controls on federal dollars going to for-profit colleges.
“This is like taking on the mob,” he said. “Be prepared for a backlash that defies imagination.”
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