Recently, President Obama made news when he admitted public schools were not good enough for his children, which is why he sent his children to a private school. No one faults the President for desiring the best education for his daughters, but rather than expand educational choices for low-income students, President Obama and his administration have acted to reduce their choices and prevent them from improving their lives. The President refused to renew a scholarship program for low-income families and revoked scholarships for 216 low-income children. Now, President Obama and Secretary Duncan through the Department of Education (DOE) have proposed regulations that may eliminate many for-profit colleges as an educational choice for millions of Americans.
In academic year 2008-09, 3.2 million students enrolled in for-profit colleges. Evidence suggests that students at these institutions are more likely to be over age 26, independent (not claimed as a dependant for tax purposes), minority, low income or from low-income families, and are the first-in-family child to seek a post-high school degree, as compared to students at traditional colleges. According to Imagine America Foundation, 43 percent of students attending for-profit colleges are minorities. Specifically, 26 percent of enrolled students are African-American and 20 percent of enrolled students are Hispanic. According to the Association of Private Sector Colleges and Universities, 31 percent are single parents and 17 percent do not have a high school diploma. According to the National Center for Educational Statistics, more than 50 percent of the students who were enrolled in for-profit colleges came from families whose parents either had only a high school degree or did not complete high school.
Historically, students who enrolled at for-profit colleges earned certificates to perform trades. While many for-profit schools continue to offer those courses of study, the options for students have increased as many for-profit institutions now offer undergraduate degrees, graduate degrees, and even some professional degrees (e.g., law and pharmacology). Also, some for-profit institutions offer classes that prepare students for post-graduate degree entrance exams (LSAT, GRE, etc.).
In 2009, students at for-profit schools received more than $4 billion in Pell Grants and more than $20 billion in federal loans provided by the U.S Department of Education, according to the Government Accountability Office (GAO).
On August 4, 2010, GAO issued a report detailing an undercover operation that targeted 15 for-profit schools. The report found that several employees at 15 for-profit schools provided false and misleading information to investigators masquerading as potential students. Clearly, this irresponsible behavior should not be tolerated, and those responsible should be prosecuted. However, the Obama administration is using the report to paint all for-profit institutions as bad actors and to justify increasing regulations on an industry that is helping many people improve their lives.
Proposed gainful employment regulation
DOE has proposed regulations that would impose a “gainful employment” test on for-profit schools and the programs they offer. Under the regulations, the DOE would assess whether programs at for-profit institutions lead to “gainful employment,” and based on the results of those tests, schools may be declared ineligible to receive federal student loans. To determine “gainful employment,” the DOE would consider the following two factors: (1) debt-to-income ratio and (2) loan repayment.
Debt-to-Income Ratio: For-profit schools where graduates have annual debt service payments that are greater than 12 percent of average annual earnings or 30 percent or less of discretionary income would fail the test.
Loan-Repayment Rate: The repayment rate applies to enrollees regardless of whether they completed the program. Programs whose former students have loan repayments below 35 percent may be ineligible.
Since the majority of students enrolled in these institutions receive federal aid, the same schools would not be able to survive, leaving students with fewer, if any, postsecondary school options. Additionally, since the DOE released the regulation for public comment, the DOE has received more than 90,000 comments on the regulations. As a result, DOE announced recently that it will release the gainful employment regulations in early 2011.
Issues of Concern
Increased Regulatory Burden: As a threshold matter, DOE’s attempt to define the term “gainful employment” in a complex and untested manner for purposes of federal student loan eligibility for educational programs offered by private sector colleges and universities far exceeds the statutory authority provided by Congress in the Higher Education Act.
Does Not Consider Interest-Only Plans: Under the regulations, a student meets the repayment rate test for “gainful employment” only when the principal on a loan is being repaid. An interest-only repayment plan—even if it is a federally authorized repayment plan—does not count towards repayment.
Overly Broad Definitions: For purposes of calculating the debt-to-income ratio part of the gainful employment definition, debt is defined to include all forms of potential student debt, including private educational loans that schools may not have full knowledge of, and institutional financing plans that many institutions provide to students as a no-interest, no-penalty method of paying for those portions of educational charges not covered by Federal financial aid programs.
Typical Repayment Periods Ignored: The loan repayment rate test fails to take into account average or typical repayment periods. Current, allowable repayment periods range from 12 to 30 years, but the DOE has chosen an across the board 10-year repayment period.
Does Not Consider Approved Forbearance Plans: The DOE’s loan-repayment rate proposal does not include students in federally authorized deferment and forbearance plans, other than in-school and military service deferments, for purposes of the repayment calculation.
Wrong Definition of Salary: To calculate the debt-to-income ratio, the DOE uses starting salaries only. While salaries increase over the lifetime of loan repayments, and lifetime earnings are a better measure of return on investment, these factors were ignored by DOE.