For-Profit Colleges

Career college lobbyists may come to rue the day that the U.S. District Court for the District of Columbia struck down the Obama administration’s Gainful Employment (GE) regulations. Because judging by the GE data that the U.S. Department of Education released late last month, the rules actually make even the worst performing for-profit higher education corporations look pretty good.

Take Corinthian Colleges, for example. The company had 44 programs that failed the Education Department’s Gainful Employment tests -- the most of any chain of for-profit schools. Yet, Corinthian College officials were able to boast to shareholders about the company’s performance. “93% of the Company’s programs comply with GE regulations for the time period measured,” the company reported to investors. “During this same period, the programs accounted for 95% of our graduates.”

This is not just good spin. It’s entirely accurate under the rules that the Education Department put in place last year. Responding to a massive lobbying campaign from the for-profit higher education industry, the administration watered down their proposed regulations to such an extent that only programs that flunk all three of the Department’s low-bar Gainful Employment tests are considered to be out of compliance. That means that only programs at which fewer than 35 percent of former students are repaying their loans and where the typical graduates have annual student loan payments that exceed 12 percent of their total earnings and 30 percent of their discretionary income would have eventually been in jeopardy of losing access to federal financial aid.

So at first glance, Corinthian Colleges doesn’t look so bad – 93 percent is an A-minus after all. But a deeper dig into the GE data provides a much more alarming picture of how the company’s students fare.

The Wall Street investment firm BMO Capital Markets conducted such an analysis and found that on the whole, Corinthian Colleges flunked two of the Education Department’s tests: the repayment rate and the debt-to-discretionary-income ratio. Only about one-quarter of the corporation’s former students who entered repayment in the 2007 and 2008 fiscal years have made payments on their federal loans -- a fact that is not surprising given that its typical graduate’s annual loan payment accounts for over a third of his or her discretionary income. In comparison, Devry University had a loan repayment rate of about 42 percent and a debt-to-discretionary income ratio of 11 percent.

Meanwhile, the average earnings for recent Corinthian College graduates is just $20,741, according to BMO’s analysis. That’s the lowest of all of the publicly traded for-profit college companies. Graduates of Devry, in contrast, had an average income of $36,517.

The dismal numbers were driven mostly by Corinthian’s Everest College brand, which primarily trains students for jobs in the healthcare industry. BMO found that only about one-fifth of the schools’ former students have made payments on their debt, meaning that about four-fifths have not paid it down by even one dollar. Again, this is not surprising considering that their annual loan payments account for a whopping 44 percent of their discretionary income.

As Higher Ed Watch has reported in the past, a high proportion of Everest College students take out private institutional loans on top of their federal debt. This is particularly worrisome since the average income of its recent graduates is only $19,629, according to BMO’s analysis. No wonder the company projects that more than half of these private loan dollars will end up in default.

Crunching the data further, I found that an incredible 95 percent of Everest College’s 297 eligible programs flunked at least one of the minimal Gainful Employment tests. [A company’s programs were included in the calculations if all of the required data was submitted on time, and they enrolled at least 30 students.] Of these programs, 254 had repayment rates of less than 35 percent, BMO reported.

The Gainful Employment regulations are supposed to expose those for-profit college programs that are putting students in harm’s way, buried in debt and without the training they need to get jobs that will help repay their loans. But the final rules are so weak that they may have instead given even the industry’s worse players cover.

This is a lesson that Obama administration officials should keep in mind as they revise the regulations. Although the federal judge’s decision was a blow to the Department, it now has the opportunity to craft better regulations -- one that won’t allow Corinthian’s shockingly poor performance get a passing grade.

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.

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. 

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.  

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.

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.

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.

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. 

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.

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.