Today the Obama Administration unveiled its long-anticipated and highly controversial final gainful employment (GE) regulation that ties program eligibility for federal student aid to new metrics that are based on student loan repayment rates. Under the new GE rule, a vocational program can qualify as leading to gainful employment and remain eligible for federal aid if one of three metrics is met:
1. At least 35% of former students are repaying their loans;
2. The estimated annual loan payment of a typical graduate does not exceed 30% of discretionary income;
3. The estimated annual loan payment of a typical graduate does not exceed 12% of total earnings.
The rule requires that a program fail to meet one of the three metric three times in a four year period before becoming ineligible for federal student aid, with 2015 being the first year that a program can lose eligibility. Education Secretary Arne Duncan defended the metrics as a “perfectly reasonable bar…that every for-profit program should be able to reach. We’re also giving poor performing for-profit programs every chance to improve. But if you get three strikes in four years, you’re out.”
Although the regulations are less onerous than earlier proposals and financial markets appear to be responding favorably , GE nonetheless represents a misguided agenda to further tilt the playing field in favor of preferred non-profit institutions by imposing rules that are not uniformly applicable to all postsecondary providers.
The Department of Education does little to alleviate this concern, as its press release repeatedly refers to how GE is intended to curb bad behavior and high loan default rates at for-profit institutions; despite the fact that gainful employment is technically applicable to all vocationally-oriented programs, regardless of tax status. Furthermore, student loan default rates are on the rise in all sectors of higher education and taxpayers are on the hook for bad debt, so it is troubling that the policy response focuses exclusively on such a small aspect (for-profit institutions enroll about 12% of all postsecondary students and account for about a quarter of all loans) of the larger looming problem of growing student loan default rates. Imposing regulations intended to reduce default rates on only one set of schools is analogous to Major League Baseball requiring only teams in the National League’s West Division to subject their players to steroid tests and prohibiting teams with a low pass rate from playing.
Rather than crediting the administration for making concessions, I believe that the GE rules demonstrate, as my colleague Richard Vedder noted, the “Obama Administration’s hostility towards business and free-market capitalism” and its preference for politically-ascribed over market-based outcomes. Meeting customer demand in an efficient manner is how profits are made in a market-based economy. Profits also determine how resources are allocated, as investors search for opportunities to earn a return on capital. Education institutions operating commercially have largely been successful because they have specialized in serving a segment of the education market with pent-up demand that had been and remains poorly served by traditional non-profit providers. The fact that the sector experienced remarkable growth and has been profitable over the past two decades should come as no surprise to those who understand how markets work.
By offering vocationally-oriented education programs and catering to non-traditional students, for-profit institutions have played an important role in providing educational programs demanded by the marketplace, and in helping expand access to low-income, minority and working adults. That they should be castigated by the Obama Administration, which established a goal for the U.S. to have the highest college attainment rate in the world by 2020, is somewhat ironic given that the for-profit institutions serve a disproportionate share of the segments of the population that would need to obtain college credentials to meet the President’s goal. The GE regulations are a setback to that goal, as they will potentially result in a reduction of educational opportunities for hundreds of thousands of non-traditional students, as some programs will likely shift their focus to enrolling less underserved segments of the population in order to comply with the GE rules. Cash-strapped public institutions are unlikely to absorb the additional demand without additional infusions of taxpayer money.
For-profit institutions have also provided much-needed competition for students and scarce public resources, competition largely unwelcome by proponents of non-profit education, including the Obama Administration and its allies. As part of its justification for the GE regulations, the Department of Education highlighted that tuition is higher at for-profit colleges than public ones, and that students borrow more to attend for-profit than public schools. It failed to mention however that public colleges receive billions of dollars in institutional subsidies, not to mention have tax-exempt status, providing them with a distinct competitive advantage that makes it nearly impossible for private sector providers to compete on price. The GE regulations further distort this already uneven playing field by imposing strict rules that apply almost exclusively to an already competitively disadvantaged segment of the market. This is a step in the wrong direction to reforming much larger problems in higher education such as skyrocketing tuition, the diminishing value of a college education, and unsustainable public financing.
Daniel L. Bennett is a research fellow at the Center for College Affordability and Productivity and a doctoral student in economics at Florida State University.