Feature, Legislation, Policy - Written by on Sunday, June 12, 2011 23:03 - 0 Comments

DOE’s Duncan unveils “gainful employment” rule

Image by Getty Images via @daylife

The Department of Education tightened a noose on for-profit colleges, which often receive billions in federal aid to offer online classes to millions of students. The DOE’s new “gainful employment” policy, formally announced June 2, will pull funding from schools that encumber students with huge debts and, arguably, worthless degrees.

By Paul Glader

Washington regulators are ramping up rules to make for-profit colleges arguably more beneficial for students, which could make them potentially less lucrative for owners and investors.

The Department of Education tightened rules on for-profit colleges that receive billions in federal aid and offer online classes and degrees to millions of students. The DOE’s new “gainful employment” policy, formally announced June 2, aims to pull funding from schools that encumber students with huge debts and, it alleges, worthless degrees.

“As a country, we need this sector to succeed,” said Secretary of Education Arne Duncan, about the new rule. “This is not about ‘gotcha.’ “

The DOE’s newest rule would cut off federal funding in the next four years to schools where graduates have a high debt load compared to income. It estimates 5% of the 13,155 for-profit programs will lose government funding and 1% of the 42,290 public and nonprofit programs will lose funding. Its additional 14 rules that take effect July 1 aim to add transparency. One requires the schools to list graduation and placement rates.

But the for-profit college industry says it won’t roll over easily. It claims the new rules limit educational opportunities for working adults, low-income and minority students. The Washington D.C.-based Coalition for Educational Success, an association of career colleges, called the new regulations “biased and nontransparent.” It said Congress, not the Education Department, should decide on the definitions of “gainful employment.”

Trade associations for the for-profit colleges are questioned the ethics of the GAO report, have spent $12 million on lobbying since 2010 and accused the Department of Education as being in the pocket of Wall Street hedge funds that are betting against the for-profit schools.

The for-profit colleges are geared toward working adults in America and underprivileged, minority students. The schools experienced astronomical growth in 2006 when John A. Boehner, R-Ohio, headed legislation that eased restrictions on federal loans going to online-only schools. These colleges – some sponsored by Wall Street banks and investors – also fared better than most other industries during the recession.

They enrolled more than 10% of all U.S. College students in 2008, while taking in 25% of the roughly $60 billion in government-backed student loans. The for-profit University of Phoenix, owned by private equity firm Apollo Group, now the largest college in the country, had 405,300 students enrolled in 2010. Kaplan, owned by The Washington Post Co., has nearly 100,000 students.

At least one For-Profit college industry veteran agrees in part with the government crackdown. Michael Clifford – who helped found Chancellor University, Bridgepoint Education Inc., Grand Canyon Education Inc. and others —  admits that private equity and Wall Street investors put “enormous amounts of pressure on these schools for growth.”

A U.S. Government Accountability Office report in August of 2010 found that enrollment in for-profit colleges soared to 1.8 million in recent years, up from 365,000. In 2009, the students in these schools received more than $4 billion in Pell Grants and more than $20 billion in federal loans from the Department of Education. Some of the schools made nearly 90% of their revenues from federal student aid.

The for-profit schools, meanwhile, had 40% of student loan defaults and are fending off new lawsuits alleging unethical practices in recruiting, inflation grading and fraudulently retaining students in order to minimize defaults and drop-outs while maximizing profits.

“I like the regulations.” said Mr. Clifford. Although he doesn’t agree with all the rules, he agrees with the general principles involved. “I think it was time to back off some of the greed from Wall Street. Some people saw it as a gold rush where they could get in, get out and take their 20% return on investment. We’re shareholders of the public trust. We have an obligation to the public trust.”

Investigative reports in a variety of news outlets in recent years showed the industry misleading students and profiting on poor and uneducated Americans, similar to how the sub-prime mortgage industry was built on selling houses to the poor. The industry countered that Wall Street hedge funds were  lobbying Washington against the industry in hopes of driving down stock prices in the for-profit colleges at the same time they bet against those stocks. But government data and lawsuits by whistle-blowers are further highlighting problems in the for-profit college industry. And the Obama Administration has taken a more wary eye to the career colleges.

Secretary Duncan said in recent months that career colleges play a vital role in educating low-income and adult workers and improving America’s global competitiveness. But, he added, “some of them are saddling students with debt they cannot afford in exchange for degrees and certificates they cannot use.”

The full regulation may be found at: http://www2.ed.gov/policy/highered/reg/hearulemaking/2009/ge-unofficial-06022011.pdf.

More information on the DOE’s negotiated rulemaking:  http://www2.ed.gov/policy/highered/reg/hearulemaking/2009/negreg-summerfall.html.

WA appreciates your comments below on the issues in this news story.

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