Financial Aid

Feds Try to Get Even Tougher on For-Profit Colleges


Feds Try to Get Even Tougher on For-Profit Colleges

Photograph by Adrianna Williams

Almost since his first days in office, President Obama has tried to rein in for-profit colleges. His U.S. Department of Education has tried to use the power of federal student loans and Pell grants to tackle programs that can be expensive, yet still leave students unprepared for the job market. Some for-profits get almost all their revenue from federal student aid, so the Obama administration already swings a pretty big stick. Now, after a two-year delay, it is seeking even greater regulatory clout.

A long and contentious process culminated in 2011 with new federal regulations over what’s called “gainful employment,” which created several tests to determine if students weren’t able to earn enough relative to what they owed on their student loans. The rules capped borrowers’ debt payments to 30 percent of their discretionary income and 12 percent of their total income. To stay on the government’s good side, colleges would also need to ensure that at least 35 percent of graduates are actively repaying down their students loans. But in June 2012, on the day before the regulations were set to go into effect, a federal judge struck down most of the rules. The requirement for a 35 percent repayment rate was arbitrary and not grounded in any studies or standards, the judge ruled.

So the Department of Education revised the rules and just before the Labor Day weekend released a new draft. The repayment rate has been eliminated as a factor altogether, but many other provisions have been strengthened. The new proposals create a probationary period if debt payments surpass 20 percent of discretionary income and 8 percent of total income. Schools must limit enrollment and warn students about the problems if they fall in the probation zone. Penalties also kick in sooner: Under the older rules, programs could lose their federal student aid funding for three years if they fail in three out of four consecutive years; in the new plan, they lose eligibility if they fail two out of three years or remain under probation for four years.

The department also proposed roughly doubling the number of programs that must comply with the new rules. While the earlier version had a 30-student threshold for inclusion, the latest proposals would lower the bar to include any program with 10 students. Based on their recent performance, about 9 percent of programs would fail under the new proposal and a further 12 percent would be on a probationary watch, according to a department analysis (PDF).

The new proposals emerged about a week before the first of two multi-day negotiation sessions on the topic. If the back-and-forth ends up anything like what happened last time around, it will entail a ferocious fight with the industry. If the negotiators can’t reach consensus, the Department of Education can issue the rules on its own. Given Obama’s recent push to tie federal student aid to performance at all schools—not just for-profits—there’s all the more pressure to get it done this time around.

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Weise is a reporter for Bloomberg Businessweek in New York. Follow her on Twitter @kyweise.

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