Obama administration may shut down 5 percent of for-profit programs under new rule

Liz Goodwin
The Lookout

The Department of Education released its significantly softened new "gainful employment" rule for for-profit colleges yesterday, which threatens to end career programs that saddle students with insurmountable debt and slim career prospects.

Career programs offered by schools such as the University of Phoenix--the nation's largest for-profit school--will no longer be eligible for federal student aid if they do not hit certain benchmarks indicating they are not leveraging students into unsustainable debt. The career programs must prove that at least 35 percent of their former students are repaying their loans; that the annual loan payment of the average graduate is less than 30 percent of his or her discretionary income; or that the graduate's annual loan payment is not more than 12 percent of his or her total salary. If the programs fail to meet these benchmarks three years out of four, they would no longer be qualify for federal grants. Enforcement of the new rules won't begin until 2015.

About 5 percent of for-profit programs will eventually be closed down under the new rule, according to Department of Education estimates, and 18 percent will fail at some point but then improve before facing sanctions. Among nonprofit private and public career programs, which outnumber for-profit career programs, only 2 percent are expected to lose federal eligibility for student aid.

The Education Department's earlier version of the rule was tougher, requiring the schools to meet the standards every year and using past debt repayment data to determine whether to close a program or not. The for-profit industry pushed back aggressively against the department's proposed "gainful employment" rule and its other regulations, which prevent colleges from misrepresenting their graduate employment rates and from paying admissions officers based on how many new students they sign up. The industry has spent millions lobbying Congress to try to defund the new regulations, and is also challenging them in court.

Education Secretary Arne Duncan said on a call with reporters that the booming for-profit industry needs to be regulated because it's largely financed by taxpayer money through federal education grants. Government reports found that some for-profit colleges aggressively target low-income and even homeless people, signing them up for federal student aid and in some cases encouraging them to lie on their application forms to qualify for more federal money. Taxpayer-funded federal education grants make up as much as 90 percent of total revenue at some for-profit schools, and much of that public money goes back into the schools' advertising campaigns.

In announcing the new rule, Secretary Duncan was stressed that it only targets some "bad actors" in the industry, and that many higher-performing career programs will not be affected. He said he hopes schools will clean their own house, and that he thinks "very few programs will actually be closed."

The for-profit industry has boomed over the past 10 years. The number of bachelors degrees given out by for-profit colleges skyrocketed by 418 percent since 2000, according to data from the National Center for Education Statistics. While for-profit students only account for about 12 percent of all college students, they take up a quarter of all federal grants and represent 43 percent of all defaults, according to data from the Department of Education. Their four-year programs cost significantly more than public institutions but have a much lower six-year graduation rate of only 22 percent.

Long-time opponents of the for-profit industry say they're disappointed the final rule was made more flexible.

"More needs to be done to prevent the waste of taxpayer dollars and protect students, including veterans, from programs that swindle them rather than prepare them to succeed in the workforce." said Pauline Abernathy, the vice president of the nonprofit Institute for College Access and Success. She said in a statement that the final rule is "substantially weaker" than the draft version.

But the Obama administration says the new rule will encourage the schools to improve to ensure that they don't lose potential students.

"Obviously schools are going to compete on reputations," said National Economic Council Director Gene Sperling on a conference call. "While it's three strikes over four years or you're out, we think schools will have a very strong incentive not to face a single strike because of the harm that would invoke. We provide a very strong incentive for schools to raise the quality of their programs so they don't get the warning strikes."

Higher education lobbyist Terry Hartle, who represents mostly nonprofit schools, tells The Lookout he thinks even though the rule is softened, many in the for-profit industry do not believe the department has the authority to regulate them and will challenge the rule in court.

"This is simply an issue that will now head to the other two branches of government," he said. He added that he doubts the department really knows that the new rule will only close 5 percent of the for-profit programs. "Nobody really knows whether this affects 1/10th of the gainful employment programs or 20 percent of the gainful employment programs," he said.

The Association of Private Sector Colleges and Universities said in a statement the group is concerned that the department "is still using the same ill-advised metric approach to this matter and is clearly outside of its statutory authority."

(Duncan: AP)

Other popular Yahoo! News stories:

The New York Times denies hacking Goldman Sachs trader's email
MSNBC's Bashir says Palin's bus tour 'could be in breach of federal law'
Citing Madoff fraud lawyer wants divorce deal do-over