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For-Profit College Rule Focuses on Student Debt For-Profit College Rule Focuses on Student Debt

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For-Profit College Rule Focuses on Student Debt

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(Mandel Ngan / AFP / Getty Images)

The Education Department took its final step in regulating career colleges like Kaplan and the University of Phoenix on Wednesday when it unveiled a final rule that prohibits for-profit and professional certificate programs from accessing student-loan money if their former students aren’t able to repay the loans.

The rule gives the schools a wide berth, however. Programs must fail for three years out of four before they are completely cut off from student loan or Pell Grant money. No programs will be ruled ineligible until 2015.

 

The administration has been looking at regulating the for-profit college industry for several years, arguing that the influx of tax dollars toward the schools justifies government oversight. For-profit colleges have protested that the rules will hurt students’ ability to gain advanced degrees at a time when President Obama has made it a priority to increase college graduation rates.

White House officials insist that the gainful-employment rule can only help the administration’s broader higher education goals. “It will only decrease access to very weak programs that leave students with a crushing debt burden and little to help them achieve the gainful employment that was supposed to be the purpose of the education they were receiving,” said Gene Sperling, director of the National Economic Council.

Under the rule, school programs will be considered eligible to take student loans if they meet at least one of the following criteria: at least 35 percent of their former students are repaying their loans, the estimated loan payment of a typical graduate doesn’t exceed 30 percent of his or her discretionary income, or the estimated loan payment doesn’t exceed 12 percent of his or her total earnings.

 

If schools have programs that fail on all three counts in the first year, they must disclose how far off the mark the program was and establish a three-day waiting period before students can enroll. If they fail twice in three years, they must tell students that their student-loan debts may be unaffordable.

The long-awaited rule is a departure from the Education Department’s proposed rule, which had imposed restrictions on school programs if their graduates' debt payments were more than 8 percent of their incomes. Those restrictions have been removed, but the 12-percent debt-to-income threshold for ineligibility remains unchanged from the initial proposal. The for-profit industry protested loudly over the benchmarks, arguing that they were unfair and would cut off a major artery of their revenue streams.

“We tried to be very thoughtful, very reasonable, give people every opportunity to succeed,” said Education Secretary Arne Duncan. “Our goal is not to play 'Gotcha.' "

The so-called gainful-employment rule was delayed by some eight months in the wake of aggressive lobbying by the for-profit colleges, which argued that the original proposal would destroy at least some schools in their sector. Other government rules to regulate the for-profit colleges were finalized last October, but the Education Department put the most controversial gainful-employment piece on hold in order to respond to the mass influx of industry comments.

 

The rule impacts all schools that have technical or certificate programs, not just for-profit schools.

The forthcoming rule has been the subject of intense Wall Street uncertainty, with stock prices of the for-profit sector rising and falling based on vague statements from the administration about what it would contain. It won’t be clear just how much the rule impacts the industry until well into the year, after the affected schools evaluate their ability to comply with the reporting requirements and their ability to meet the criteria.

The Education Department predicts that only 2 percent of career and certificate programs would lose student-loan eligibility under the rule, although 8 percent of those programs would fail at least once before improving on at least one of the three eligibility criteria.

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This isn’t the only hit the career college sector has taken over the past two years. Senate Health, Education, Labor, and Pensions Committee Chairman Tom Harkin, D-Iowa, has engaged in a series of investigations and hearings highlighting how technical colleges allegedly mislead and defraud students. This hasn’t helped the schools’ stock prices. On top of that, two private-sector college companies are under investigation by the Education Department’s inspector general.

The disputes are likely to continue in court. The first rules on for-profit colleges elicited a lawsuit against the Education Department from the Association of Private Sector Universities and Colleges, which argued that the sheer volume of work required to comply takes away from for-profit schools’ ability to help students. The Coalition for Education Success, a smaller industry group, sued the Government Accountability Office over its investigation of the industry and a subsequent report that was issued last August.

Democrats seemed satisfied, at least, with the rule. Harkin called it a "modest first step" toward reining in for-profit schools while warning that policymakers should pay attention to the waste, fraud, and abuse of taxpayer dollars.

House Education and the Workforce Committee ranking member George Miller, D-Calif., was more enthusiastic, saying the rule is "rightfully focused" on students and taxpayers.

Education and the Workforce Chairman John Kline, R-Minn., said he is "concerned that this regulation could undermine an entire sector of colleges in the name of rooting out a few bad actors."

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