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New Rules for Schools

For-profit schools got fat on federal education money. Now the government wants to put them on a diet.

Katherine Mangu-Ward
July 28, 2010

When parents of the nation’s art history majors open their tuition bills, the same question springs, unbidden, to many lips: How are you ever going to get a job with a degree like this?

When the federal government is paying the bills (or, more to the point, making the loans), the dynamic remains more or less unchanged: Whoever shells out the cash for school wants some assurances about results. Which explains why, on Friday, the Department of Education issued proposed regulations [PDF] on how much debt students should be allowed to take on in the pursuit of certain degrees.

Ironically, the useless hordes of art history majors and other liberal arts dilettantes (among whom I proudly count myself) will be left unmolested. Loan-laden philosophy majors will be welcome to continue on their merry way, taking classes with names like “Art, Love, and Beauty” or “Tragedy and Political Theory”—two actual classes I took as an underwater undergrad benefiting from federally-subsidized loans and grants. If, however, I had chosen to enroll in a physician’s assistant program at a school like the University of Phoenix or Kaplan University, Uncle Sam would have some strongly worded thoughts on my appropriate levels of debt.

The proposed rules are complicated—and not yet fully worked out. But the basic idea is this: In order to be eligible for student aid within a career-oriented for-profit institution, programs will have to prove that their graduates aren’t taking on loans that would require them to spend more than 8 percent of the total income from their eventual “gainful employment in a recognized occupation” on loan service payments. Failing to meet that standard—or alternative standards designed to determine debt loans and repayment rates for students in a given program—means the schools would be forced to disclose data about debt levels to all prospective students. Programs with loan repayment rates below 35 percent or debt loads above 12 percent of student income become automatically ineligible for federal grants and loans; about 8 percent of currently enrolled students will be affected by those ceilings. More than half of the remaining students are in programs that will have to make some modifications to meet the proposed federal guidelines.

The new rules are designed to keep track of the massive flood of federal higher education dollars coursing through the system. President Barack Obama made it clear that he wants more Americans to enroll in post-secondary education. Lots more. And he’s willing to spend more money to get those numbers up. Lots more. And he can’t get the kind of enrollment boom he’s looking for without fast-growing for-profit schools. Secretary of Education Arne Duncan is typically careful to acknowledge the positive role of for-profit schools in increasing educational opportunity, and he seems to be admirably free of the reflexive hostility to the industry demonstrated by many education bureaucracy lifers. Instead of condemning for-profits as schools that feed on federal loan dollars, siphon the big bucks off for investors, and stick students with the bill, he says stuff like this: “These schools—and their investors—benefit from billions of dollars in subsidies from taxpayers, and in return, taxpayers have a right to know that these programs are providing solid preparation for a job.”

As the public notice of rule making notes: “In recent years, enrollment has grown rapidly, nearly tripling to 1.8 million between 2000 and 2008. This trend is promising and supports President Obama's goal of leading the world in the percentage of college graduates by 2020.” But immediately afterward there’s this: “The programs offered by the for-profit sector must lead to measurable outcomes, or those programs will devalue post-secondary credentials through oversupply.”

All of which is true. That leaves us at an impasse. Federal money means federal oversight. The for-profit education sector is up to its neck in taxpayer dollars. In 2009, according to the backgrounder in the proposed rule document, the five largest for-profit institutions received 77 percent of their revenues straight from the federal student aid program—and that doesn’t even include sideways education funding like veterans’ benefits or federal job training money. Beating that kind of addiction to government money is tough, maybe impossible. A steady flow of federal education money is so irresistible that schools of all types will make all manner of concessions to federal oversight just to guarantee next fall’s fix.

But “measurable outcomes” or the lack thereof are not the problem. College degrees and other credentials don’t pay off like they used to precisely because every Joe Schmo seems to have one these days. If Obama’s goal for large increases in college and other post-secondary enrollment are met, such degrees will be worth even less as a signaling device to potential employers. And pushing people to log more years in school for the sake of increasing America’s attendance figures simply means that skills required for various professions that were once acquired outside the realm of formal education—in an apprenticeship or by learning on the job—will be pushed into the federal-funded higher education sector.

As for the new rules, we’re now in the mandatory 45 day comment period, where members of the public can chime in with their thoughts about the who deserves federal education money and on what terms. And Congress may yet have some strong opinions to share on the matter. But the most trenchant comment has already been made by Terry W. Hartle of the American Council on Education when he told Inside Higher Ed that the proposal is "the most complicated regulatory package that the Department of Education has ever promulgated.”

The new rules will require schools to track graduates on a unprecedented scale, offer massive disclosures to students (who probably won’t read them anyway), and tweak their program prices to slide in just under the threshold. Some programs that were previously on the cheap side will realize they are leaving money on the table and inflate their prices, ignoring what the market will bear in favor of what the bureaucrats will allow, just as traditional schools figured out how to do long ago.

This kind of regulatory burden takes a fast-growing sector and briefly slows it down while schools scramble to rejigger the math—all without disturbing the status quo where for-profit programs continue to pull from the federal teat. Some students will wind up with less debt, but others will no longer be able to enroll in programs they previously found appealing. More federal money plus more oversight simply means more energy spent tailoring programs to maximize the amount of federal dollars coming in.

People are right to be peeved that their tax dollars are going to fund college educations that don’t make fiscal sense for anyone. But this problem isn’t unique to for-profit career programs. My college education probably shouldn’t have been subsidized by your taxpayer dollars either.

Katherine Mangu-Ward is a senior editor at Reason magazine. This column first appeared at Reason.com.


Katherine Mangu-Ward is Managing Editor, Reason


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