NEW YORK (AP) — The government is moving forward with its crackdown on the country's for-profit schools, aiming to protect students from taking on too much debt to attend schools that do nothing for their job prospects.
The Department of Education has finalized its
"gainful employment" rule, which will ban for-profit schools like
DeVry University or Apollo Group Inc.'s University of Phoenix from accessing
federal financial aid dollars if too many of their graduates are unable to find
jobs that pay enough to allow them to afford their student loan payments. If
graduates owe too much relative to their income, or too few former students are
paying back their tuition loans on time, schools stand to lose access to Pell
grants and federal student aid. Such a loss would seriously crimp schools'
ability to attract students.
"These new regulations will help ensure that
students at these schools are getting what they pay for: Solid preparation for
a good job," Secretary of Education Arne Duncan said Thursday. "We're
giving career colleges every opportunity to reform themselves but we're not
letting them off the hook, because too many vulnerable students are being
hurt."
Most students at career colleges and vocational
schools pay tuition with federal financial aid dollars — as much as 90 percent
of a school's revenue can come from government aid. But that leaves taxpayers
on the hook if students can't find good jobs and default on their loans.
And they are defaulting in large numbers.
Students at for-profit institutions such as
technical programs and culinary schools represent just 12 percent of all higher
education students but 46 percent of all student loan dollars in default. The
average student earning an associate degree at a for-profit school carries
$14,000 in federal loan debt versus the $0 debt burden of most community
college students.
Government scrutiny of the industry grew as the
Great Recession exacerbated students' debt burdens. The DOE last fall created
rules to rein in deceptive advertising and barred schools from paying
enrollment counselors based on how many students they signed up, among other
measures. The agency drew up the "gainful employment" rule in 2010,
but delayed putting it into effect as it faced heavy lobbying from schools and
politicians.
Under final terms of the law, announced Thursday,
schools will only be able to receive federal-paid tuition if at least 35
percent of its former students are repaying their loans. Or, the estimated
annual loan payment of a typical graduate must not be bigger than 30 percent of
his or her discretionary income, or 12 percent of his or her total earnings.
"We're asking companies that get up to 90
percent of their profits from taxpayer dollars to be at least 35 percent effective,"
Duncan said. "This is a perfectly reasonable bar and one that every
for-profit program should be able to reach."
Many maintain that the rule will protect students
from toxic programs.
"The Department of Education's gainful
employment rule is a modest and important first step to protect students and
taxpayers from subprime academic programs that have a demonstrated track record
of failure," said Sen. Tom Harkin, D-Iowa, who's chaired a series of
hearings critical of the for-profit sector.
"The only programs that would lose funding
would be programs that are consistently failing to provide students with
gainful employment, and are providing them with insurmountable debt," adds
Pauline Abernathy of the Institute for College Access & Success, an education
advocacy group that favors more industry regulation.
Others, including the National Black Chamber of
Commerce and the Hispanic Leadership Fund, have said the new federal rule could
hurt minority and low-income students by eliminating important funding options
and therefore reducing the number of schools they can afford to attend.
Congressman John Kline, R-Minn., filed an amendment in February to try to cut
DOE funding in order to stop the rule from being enacted. Harris Miller, the
president of Association of Private Sector Colleges and Universities, an
industry group, has said the rule has "fundamental legal flaws"
because the DOE is "engaging in a form of price fixing," which it
doesn't have the authority to do.
To a point, the lobbying worked. Under the rule's
original terms, programs that failed to meet the criteria would have lost
federal loan eligibility immediately and enrollment would have been frozen at
any school in danger of failing. The finalized rule gives schools multiple
chances over a four-year period to improve their stats. After "three
strikes," a school would lose eligibility for three years.
"We're focusing on improving (for-profit
programs) rather than closing them. Students would be better off if their
programs were stronger rather than closed down," said James Kvaal, a DOE
official, during a conference call with reporters.
The DOE said it expects 18 percent of for-profit
schools' programs to fail its tests at some point, and 5 percent of programs to
lose eligibility under the new law.
There's a lot at stake for the schools and their
investors, who have benefitted from the surge in for-profit programs hitting
the market in the last decade. The country's largest chain, Apollo Group, has
seen revenue and net income grow about eightfold since 2000. And despite the
hit that the sector has taken from increased regulatory scrutiny, Apollo's
stock has more than quadrupled in that time.
But BMO Capital Markets analyst Jeff Silber sees
profits declining or stagnating at most for-profit schools over the next few
years. New enrollments are dropping sharply after years of double-digit growth
as the schools adjust their businesses to accommodate the government's stricter
oversight.
Some schools have been trying to get out in front
of the new laws and adapt their business models to the new reality. Apollo's
University of Phoenix, for example, now offers a free, three-week orientation
that helps weed out unprepared students without charging them. The Washington
Post Co.'s Kaplan education division has also put in place a free trial period
so students can see if they really want to commit to school. Career Education
Corp. is making new online undergraduate students pass a college prep course if
they haven't attended college before — if they can't do the work, they can drop
out without paying tuition.
University of Phoenix spokesperson Rick Castellano
said Thursday that he had no comment on the new regulations since he had not
yet seen them.
Copyright
2011 The Associated Press.
