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For-Profit Colleges

Court Strikes Down "Gainful Employment" Repayment Rate that Was Embarrassingly Low to Begin With

July 2, 2012

Last year the Obama administration implemented "gainful employment" regulations designed to identify higher education programs, primarily in the for-profit sector, that load students up with debt in exchange for low-value credentials and degrees. The trade association representing for-profits promptly filed a lawsuit, and won a significant court victory yesterday when a federal District Court Judge ruled that the U.S. Department of Education failed to justify one part of the regulations. Because the part in question is intertwined with the regulations as a whole, implementation of "gainful" is now on hold. The U.S. Department of Education will need to appeal the decision and/or craft new regulations. But it's important to keep in mind what the decision did and did not say – and to remember how disassociated this debate can become from common-sense notions of success in higher education.

Significantly, the judge rejected most of the broad attacks on "gainful." The Department does, he said, have the authority to interpret the phrase "gainful employment" and craft regulations accordingly. "Concerned about inadequate programs and unscrupulous institutions," he wrote, "the Department has gone looking for rats in ratholes—as the statute empowers it to do.” So this is not a question of whether the federal government can regulate higher education this way – only how. 

Where the Department fell short, according to the judge, was in justifiying one prong of the three-prong test used to evaluate job-focused higher education programs. Under the rules, programs are evaluated on three measures: a debt-to-earning ratio (that is, how big your loans are compared to how much money you're making), a debt-to-discretionary-earnings ratio, and a loan repayment rate. The first two measures were valid, he said, because the Department had presented research backing up the specific thresholds they chose. The 35 percent repayment rate threshold, by contrast, was essentially chosen as a number that would land on some Goldilocks middle ground between identifying too many and too few programs. This is arbitrary, according to the judge, and since the three measures work together in determining eligibility for financial aid, the whole regulatory apparatus is suspended.

Before talking about what's next, let's pause for a moment and consider that number. Thirty-five percent?  The for-profit industry's trade group is standing up in front of the world and saying it can't live with a rule that excludes programs from federal financial aid only if two-thirds of students are failing to pay loans back and–emphasis, and–the program also fails both debt-to-income measures, for three out of four years. Thirty-five percent is an embarrassingly low number. The problem with requiring a research basis for a repayment rate threshold is that "embarrassingly low" isn't a concept that can be proven empirically. It relies on the informed, expert judgement of the U.S. Department of Education.

But think of it this way: Does there exist, somewhere in the realm of logic and reason, a cogent argument for a threshold below 35 percent? Could any credible person explain the public policy rationale for allowing programs to access federal financial aid when graduates are twice as likely to be in non-repayment as otherwise? I think not. And that's why the Obama Administration can't use this setback as an excuse for backing down from a worthy fight. Obviously, the decision must be appealed in court. But there are many other things that may or may not happen besides. The Department can move aggressively to fix and improve the regulations, or it can dilly-dally and allow them to die a slow death. Some of the original champions of "gainful" don't work for the administration any more, and it remains to be seen whether their successors are willing to do the right thing and bear the political heat that will inevitably come from standing up on behalf of students.

Grappling with Higher Education's Gordian Knot

June 28, 2012

Earlier this year I had a chance to spend some time in San Francisco and Silicon Valley, talking to a host of venture capitalists and ed tech startup companies about the recent surge of investment and entrepreneurialism in the education sector. It was fascinating and, coming from the traditionally-minded, government-focused world of Washington, DC, a lot like visiting a foreign country.

So it was fun to see many of the same people again last month, this time closer to home, on the top floor of Microstrategy’s semi-circular glass headquarters in Tyson’s Corner, Virginia. The meeting was co-hosted by Michael Saylor and former Lotus 1-2-3 CEO and current investor/philanthropist Mitch Kapor. One of the featured guests was Aneesh Chopra, the charismatic former Chief Technology Officer for the United States of America and rumored candidate for the Lieutenant Governor of Virginia who was once described by Jon Stewart during a Daily Show broadcast as the “Indian George Clooney.” 

My friend Michael Staton was there, representing the college social networking and student engagement company he founded, Inigral. So were the guys from New Charter University, a recently-launched low-cost online university startup, and Eren Baldi from the online learning platform Udemy, along with a collection of tech people, for-profit college executives, and Obama administration representatives. 

Gainful Employment Data Lets Too Many Poor Performers Off the Hook

June 26, 2012

Today the Department of Education released the first round of its much-anticipated Gainful Employment (GE) data, giving us a peek into how programs and institutions might fare under the new regulations. These rules, which went into effect last year, are meant to address concerns about poor outcomes for students in vocational, career-focused programs that receive federal financial aid. Although institutions in all sectors (public, private, and for-profit) have “gainful employment” programs, GE was widely seen as the Department’s attempt to regulate the for-profit higher-education industry, whose students borrow federal loans and default on them at rates that are far disproportionate to their numbers.

Today’s data are informational only—they don’t result in sanctions for programs or institutions. While the data contains few surprises, they underscore the need for a more systematic approach to holding institutions that receive federal financial aid accountable for a bare minimum of outcomes.  

An Unsettling Settlement in Class Action Lawsuit Challenging Sallie Mae's Subprime Lending Practices

June 19, 2012

Did Sallie Mae officials engage in an elaborate scheme to hide the rapidly deteriorating state of the company’s private student loan portfolio from Wall Street at a time when they were trying to complete a buy-out deal that would have brought them great riches? Were they systematically pushing subprime private loan borrowers at for-profit colleges into forbearance to mask the amount of risk they were taking on by making such high-cost loans to this vulnerable group of borrowers?

Unfortunately, we’ll probably never know the answers to these questions, which are at the center of a class action lawsuit that a group of investors have brought against the company (click here for part 1 of the suit and here for part 2). That’s because a federal district court judge in Manhattan – William H. Pauley of the Federal District Court in Southern New York – has preliminarily approved a $35 million settlement agreement between the parties that would not require Sallie Mae to admit to any wrongdoing. A final ruling on the settlement is expected in August.

While the shareholders will make out well from this deal, the real victims of Sallie Mae’s apparent scheme – the low-income and working-class students who never should have been steered to these risky loans in the first place – will not even get the satisfaction of seeing this case get its day in court. Sallie Mae will essentially get off scot-free ($35 million is hardly even a wrist slap for a company that holds nearly $140 billion of federally guaranteed student loans), many of these borrowers will be stuck with this debt hanging over them for the rest of their lives.

At a time when there is so much concern about a potential student debt bubble, the allegations made in this lawsuit should be getting more attention. With that in mind, I am re-posting a piece I wrote for Higher Ed Watch in October 2010 that lays out the investors’ case and shows why it is so regrettable that the questions posed at the top of this post may never be answered.

A Pyrrhic Victory for Career College Lobbyists

June 13, 2012

Last week’s federal appeals court decision in a case challenging several of the Department of Education’s new program integrity rules was not as favorable to the for-profit higher education industry as some have reported. While the three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit ordered the Education Department to make changes to the rules, it upheld the regulations overall and rejected the central argument for-profit college lobbyists made in their lawsuit: that the Education Department acted “arbitrarily and capriciously” in forging new rules aimed at preventing unscrupulous schools from taking advantage of financially needy students.

The ruling came in a lawsuit that the Association for Private Sector Colleges and Universities (APSCU) filed early last year to get the court to strike down several regulations that the Obama administration enacted in July to rein in the industry. The rules in question eliminated the “safe harbors” that Bush administration officials put in place in 2002 to help for-profit schools skirt a long-standing federal law that prohibits colleges from compensating recruiters based on their success in enrolling students; bolstered the role that states play in preventing fraud, waste, and abuse in the federal student aid programs; and strengthened Department rules barring colleges from providing misleading information to prospective students and others about their programs.

In its suit, APSCU (which was formerly and more appropriately known as the Career College Association) portrayed its members as being innocent victims of an administration on a crusade against their institutions for no apparent reason. In this alternate reality, the abuses that the Department’s leaders sought to address were nothing more than figments of their imagination. “The final regulations are not the product of a reasoned decision-making process,” the career college group wrote in its initial complaint. “Their adoption dramatically affects private sector schools and their students, yet they are unsupported by factual evidence or logical reasoning.” The Department’s decision to overturn “the safe harbors,” for example, was not “a real solution to a real problem,” the group stated in a later filing.

Asset Building News Week, May 14-18

May 18, 2012
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The Asset Building News Week is a weekly Friday feature on The Ladder, the Asset Building Program blog, designed to help readers keep up with news and developments in the asset building field. This week's topics include housing, women in poverty, access to public assistance, banking, student loan debt and inequality.

Cordray Answers Advocates' Questions During National Call

January 18, 2012
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Richard Cordray, director of the CFPB, spoke yesterday to advocates across the U.S. in a national field call hosted by Americans for Financial Reform. The call was designed to provide a point of direct engagement between communities and the federal government.  These calls were originally started by Elizabeth Warren when she was the Acting Director, and Cordray promised to continue the calls regularly to improve transparency and to give the bureau opportunities to respond to localized questions directly. Cordray emphasized his commitment to moving forward with the full authority of the agency and entertained questions on a wide range of issues in an effort to identify advocates’ key concerns. 

New Feature: Asset Building News Week

January 6, 2012
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Way back in 2011, we conducted a survey of readers that told us a number of things: importantly, we learned that many of you look to us for timely news from the asset building field and that a regular round-up of articles would be a welcome addition to our other content. In keeping with the spirit of 2012 and resolutions and all that good stuff, the Asset Building Program is introducing a new weekly blog feature: a Friday news round-up. We hope this will help you (and us, for that matter) keep up with developments in the field, note-worthy news, and learn about partner organizations working around the U.S. on asset building, economic security, anti-poverty policy, and accessible financial services for low- and middle-income Americans. Topics will vary week-to-week (and depending on the news!) but we’ll aim to provide a diverse overview of the things we’re keeping an eye on that we think you’ll find interesting too.

GAO Report Highlights Research Gap on Postsecondary Student Success

December 8, 2011

Over the past two years, the higher education policy discussion has been chock full of debate over for-profit institutions. Are they high quality? Do students gain valuable skills? Should the students who attend them be eligible for federal grants?

At the request of Congress, this week the GAO released a report that focuses on student outcomes at for-profit institutions compared to their non-profit and public counterparts. The GAO’s findings mostly conform to the criticisms leveled against the industry in recent years – students from for-profit schools tended to have lower bachelor graduation rates, higher unemployment, more student loans, and less success passing licensing exams – and that may well be how the headline gets written in what has become a very polarized debate in Washington.

But there is another headline buried in this latest GAO report.

There is a severe lack of rigorous research available on student outcomes by institution type.

Rather than conduct their own study of higher education outcomes, the GAO conducted a literature review using 11 studies concerning the efficacy of for-profit institutions on a variety of outcomes. But by using pre-existing studies, the GAO faced a series of limitations. For example, while many of the studies controlled for one or two student characteristics, such as race, gender, or socio-economic status, some did not control for all of the characteristics. Because academic outcomes tend to vary widely depending on these characteristics, not including all of them in a statistical model is problematic. Similarly, some studies did not differentiate between whether a school was 2- or 4-year or whether students transferred among programs, providing a limited picture of the context in which students are educated.

Additionally, GAO researchers studied whether students from for-profit institutions are more or less likely pass 10 different types of occupational licensing exams. While this did involve original research, the study still faces several limitations. For example, because it only examines students who enter professions that require licensing exams (nurses, lawyers, cosmetologists, etc…) it does nothing to address the success of students in other fields. Due to data limitations, the study does nothing to control for student characteristics when it considers outcomes. According to the GAO, for-profit institutions tend to attract more minority and low-come students than other types of schools. Though the study concludes that non-profit and public school students do better on all but one licensing exam, an analysis that controlled for student characteristics might show something different.

The lack of solid research on student outcomes by school type is not that surprising. Until recently, research was limited by data availability as most available datasets are old, limited in scope, or small. But this will not always be the case. As states begin to improve their higher education data systems, linking K-12 data with higher education and workforce outcomes, they will open up a world of rich student-level data. In the meantime, Department of Education datasets, like the National Postsecondary Student Aid Survey (NPSAS) and the National Student Loan Data System (NSLDS) provide ample opportunities for researchers looking to improve the quality of studies on these important questions.

Hopefully researchers will see this GAO report as a call to action. The unknowns surrounding student outcomes at all school types are too great and the costs to taxpayers and students too large to leave these questions unanswered.

Exclusive: How the Widening Job Placement Rate Scandal Could Have Been Avoided

November 15, 2011

[Over the last several months, Higher Ed Watch has examined how many for-profit colleges cook the books on the job placement rates they disclose to prospective students and regulators. In prior posts, we have looked at how the manipulation of these rates is a widespread problem throughout the industry; revealed some of the most common tricks of the trade for-profit schools have used to inflate these numbers; showed how accreditors and regulators have been asleep at the switch as these abuses have been occurring; reported on the Obama administration's unsuccessful effort to curb these practices; and examined how the drive to manipulate these rates comes straight from corporate headquarters and not rogue employees (see here and here). Today, we finish up this series by going back in history to see how this all could have been avoided.]

The origins of the widening job placement rate scandal in the for-profit higher education sector go back nearly 20 years. Had the Clinton administration officials who ran the Department of Education at the time heeded the warnings of Congressional investigators, the Government Accountability Office, and its own Inspector General, the abuses that are being unearthed today could have been rooted out long ago.

The story begins in the early 1990s when a Senate oversight committee headed by Sam Nunn (D-GA) conducted an investigation that uncovered widespread fraud and abuse in the for-profit higher education sector. The Nunn Committee revealed that scores of unscrupulous schools were reaping profits from the federal student aid programs by enrolling people straight off the welfare lines and pressuring them to sign up for student loans they had little hope of ever repaying. Many of these individuals were lured into the schools with false promises about the lucrative jobs they would be able to get after attending these institutions.

When it came to assigning blame for the federal government’s failure to stop these schools from ripping off students and taxpayers, the committee found that there was plenty to go around. However, the panel reserved some of its harshest criticism for the accrediting agencies that had failed to weed out these institutions or even to detect that anything was amiss.

In its final report in May 1991, the committee urged the Education Department to work with the accreditors to strengthen their ability to carry out their oversight responsibilities or strip them of their gatekeeping role entirely. As part of this effort, the committee recommended that the Education Department be required to “develop minimum uniform quality assurance standards” that accreditors would use to evaluate for-profit schools -- including establishing a single methodology for calculating job placement rates. According to the report:

The Department should be responsible not only for formulating those standards, but also for developing and carrying out a meaningful review and verification process designed to enforce compliance with those standards. If the Secretary determines that an accrediting body does not or cannot meet these requirements, recognition should be terminated.

In 1992, as part of legislation reauthorizing the Higher Education Act (HEA), Congress followed up on this recommendation by requiring the Education Department to put in place standards it expected accreditors to meet as part of its evaluation process. Lawmakers also required the accrediting bodies have standards in place for judging a school’s “success with respect to student achievement in relation to its mission, including, as appropriate, consideration of course completion, State licensing examination, and job placement rates.”

When the time came for the Clinton administration officials in charge of the Education Department to write the rules for carrying out the Higher Education Act revisions, they took a very narrow reading of these requirements. Noting that Congress had not explicitly mandated the establishment of uniform standards, they gave accreditors wide latitude to develop their own criteria for judging a school’s “success with respect to student achievement” and for verifying the information that schools would provide them. Department officials explained in the preamble to the regulations that they had to stick “closely to the law” to avoid “regulation driven management.”

Both the Government Accountability Office and the Education Department’s own Inspector General Thomas Bloom objected to the final rules. In blistering testimony Bloom delivered to a House Government Oversight subcommittee in 1996, he accused the Department’s leaders of misinterpreting the intent of Congress:

By requiring the Department to ‘set standards’ for evaluating accrediting agencies in specified areas, Congress was directing the Department to put meat on the bare-bones statutory language in order to ensure that the agencies had meaningful, quantifiable, and enforceable standards for their member schools…the Department’s regulations are not what the 1992 HEA amendments contemplate.

The failure of the Department to set standards and require vigorous enforcement would only lead to more fraud and abuse, Bloom argued:

Without enforceable standards, schools that fall short of their own accrediting agency standards -- even in such basic areas as graduation and job placement -- may continue to be accredited and continue to participate in the SFA [student financial aid] programs. Since what you measure you get, without measurement and enforcement of even these basic standards for student achievement, we cannot assure that vocational trade schools in the SFA program will consistently graduate and place the bulk of their student in jobs for which they were trained.

Bloom’s testimony was prescient. As we’ve previously written, the job placement rates that for-profit colleges are required to disclose to prospective students and report to accreditors are fundamentally flawed. The methodology that career colleges use to calculate the rates vary accreditor by accreditor, making them impossible to compare. And because neither accreditors, state regulators, nor the federal government make much of an effort to verify these rates, schools have found them easy to game (see here for some of the most common tricks of the trade).

At Higher Ed Watch, we believe that the Nunn Committee and the Inspector General were right and that federal officials should develop a single, national standard that for-profit colleges would be required to use when calculating their job placement rates. It would be accompanied by a strict regulatory regime that would more closely monitor schools to ensure that these numbers are not rigged.

The Obama administration tried to move forward with such an effort but bungled it. However, as evidence of widespread abuses mount, we believe that policymakers won’t have any other choice but to revisit this issue.

It’s just a shame that all the damage that has been done to unsuspecting students and taxpayers could have been avoided.

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