Government Meddling and For-Profit Colleges

The Education Department’s boom has finally fallen on for-profit colleges, much-criticized for their high rates of default on their students’ education loans, loans that U.S. taxpayayers have to repay when graduates of proprietary schools can’t find jobs either because the jobs don’t exist or because the training for which the students have paid doesn’t strike prospective employers as adequate.
If a set of proposed rules issued last week by Education Secretary Arne Duncan goes into binding effect; a majority of programs at for-profit colleges would be subject to restrictions on availability of federal loan funds, and about 5 percent of those schools programs would lose access to federal loan dollars altogether. Since for-profit colleges typically derive close to 90 percent of their income from government- guaranteed loans to their students, the Education Department’s rules threaten to curtail their operations and even put some investor-owned schools out of business altogether.
Administrators of for-profit schools and their allies are crying foul. They argue that the government should also crack down on loan funding for programs at non-profit colleges, many of which also depend heavily on student-loan proceeds for income and many of whose graduates–say, art-history or women’s-studies majors–find themselves unemployed and perhaps unemployable after graduation. The current proposed rules, for-profit advocates contend, discriminate against low-income students who choose career colleges instead of the liberal-arts schools that middle-class young people tend to select. The advocates may have a point–but isn’t there a larger point? Should the government be in the business of providing money to everyone who wants to go to college in the first place? And if so, to what extent? If a $100,000 bachelor’s degree in English literature from a liberal-arts college and a $14,000 career-college certificate as a medical assistant–training that many medical assistants obtain for free on the job–don’t do much to improve their recipients’ employment prospects, why are taxpayers underwriting the cost of supplying either? What public good is served?


The one hopeful sign for the for-profits is that the regulation-prone Obama administration didn’t propose even tighter restrictions on lending than it did. During the spring the Education Department was considering an absolute ban on federal aid for programs in which a majority of students’ loan payments exceeded 8 percent of the lowest quarter of expected earnings for their profession based on a 10-year repayment plan.
The actual proposed rules–set to become binding in November after a comment period–are far more flexible, using a two-part test based on the percentage of borrowers who are paying down the principal on their loans and the relationship between debt and earnings for students enrolled in that program.
Programs whose graduates have an average debt-to-income ratio of less than 20 percent of discretionary income or among whose graduates at least 45 percent are paying down principal would be eligible for full student aid. Programs whose graduates have an average debt-to-income ratio of more than 30 percent of discretionary income or more than 12 percent of total income or among whose graduates fewer than 35 percent are paying down principal would be ineligible for loan aid. Programs that fall in between these extremes would be subject to restrictions in enrollment in order to qualify for loan aid. They would also be required to demonstrate employer support for their programs and to warn both current and prospective students about the high debt levels they would be likely to incur.
The new proposed rules at least seem to recognize that some proprietary colleges do a decent job training their students for occupations that pay reasonably well–and thus provide a valuable service to society: Only programs with very high loan-default rates would be denied loan funding and therefore would likely disappear. The department estimates that about 5 percent would lose loan eligibility–although a full 55 percent would fall into that middle category that would entail restricted enrollments and fewer prospective students likely applying.
The for-profit industry is already protesting the proposed rules–as well it should, because government regulation will be supplanting decisions by prospective students and their parents about the educational choices that work best for them as individuals. Yet there’s that old adage about taking the king’s shilling. Proprietary institutions of higher learning are nearly completely dependent on government largesse to their students these days, and that largesse adds up to quite a few shillings: more than $1 billion in federal Pell grants alone to the University of Phoenix for the 2009-2010 academic year, a 62 percent increase over the 2007-2008 year, The Quick and the Ed website reports. Non-profit colleges also reported huge increases last year in Pell income: 58 percent. Still, because for-profits seem to be taking an ever-increasing share of student-aid dollars while outpacing their public and private non-profit competitors in loan defaults, it is not surprising that a regulation-minded presidential administration is now laying down a heavier hand on their programs.
In an ideal world the problem of loan defaults, apparently stemming from mismatches between students’ academic qualifications–or lack thereof–and the programs in which they enroll, and between what the programs offer and employers’ idea of a well-trained job applicant, would be solved by the market. And the market would function more effiiciently if there were more information about what for-profit colleges actually teach. Right now we know very little. We have anecdotes: tales of students who signed up at proprietary nursing schools and discovered that their “clinical” training consisted of dispensing pills; or of instructors forced by for-profit administrators to pass students who couldn’t do the work. We don’t know whether those are outlier incidents or mainstream fare at career colleges. As Daniel Bennett of the Center for College Affordability and Productivity writes: “Presumptive students and their parents lack good outcome-based information that would permit better decision-making in the college-selection process.” Until for-profits are more transparent about their course offerings and more focused on quality, they should not be surprised at the regulatory heavy-handedness that currently accompanies the federal largesse on which they live.
Of course the best solution of all might be a rethinking of the whole idea of federal student loans for everyone and a tying of loan aid more closely to students’ actual academic promise and performance. That might benefit not only today’s loan-burdened college students and the taxpayers who ultimately underwrite defaults but society as a whole.

Charlotte Allen

Charlotte Allen blogs for the Los Angeles Times and writes frequently about cultural trends for the Weekly Standard.

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