‘Gainful-employment’ rule to test for-profit colleges

Final plan has concessions to soften effect

The quality of for-profit colleges in the United States “has been very uneven,’’ said Education Secretary Arne Duncan. The quality of for-profit colleges in the United States “has been very uneven,’’ said Education Secretary Arne Duncan.
By Daniel de Vise
The Washington Post / June 3, 2011

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WASHINGTON — Federal education officials are tightening oversight of the burgeoning for-profit higher-education sector with yesterday’s release of a new regulation they say will require career preparatory programs to yield “gainful employment.’’

The action culminates a lengthy debate between the Obama administration and for-profit college leaders and includes several concessions to the industry meant to soften the regulatory effect. The most important change from a previous draft introduces a multiyear grace period before deficient programs are shut down.

The rule could face a legal challenge in courts and is likely to draw close scrutiny from Congress. Republican lawmakers and some Democrats have voiced support for the industry.

The rule effectively would shut down for-profit programs that repeatedly fail to show, through certain measures, that graduates are earning enough to pay down the loans taken out to attend those programs. Advocates say it addresses the chief complaint against for-profit schools, that students emerge from them with too much debt and too little earning power.

“The quality here has been very uneven,’’ Education Secretary Arne Duncan said of the industry in a recent conference call with reporters. “There have been some absolute superstars. And there have been some players whose intentions, quite frankly, we doubt.’’

The 3 million students in for-profit schools have already felt an impact. In anticipation of the rule, large for-profit providers have slowed enrollment, tightened entry standards, and warned students against excessive debt.

Leaders of the for-profit sector say they serve a population of nontraditional students who might not otherwise secure a higher education. In general, they have contended that a gainful-employment rule will hurt students by shuttering programs and setting off an industry contraction.

Late Wednesday, some leaders in the for-profit sector had a cautious response to the rule.

“I want to acknowledge that the department did make changes,’’ said Harris Miller, president of the Association of Private Sector Colleges and Universities. “But we really don’t know the bottom-line impact on students and programs.’’

The new regulation takes effect in July 2012. It will deny federal aid to programs that fail three “tests’’ of gainful employment three times in a four-year span:

■Are at least 35 percent of former students actively paying down their loans? In other words, roughly a third of ex-students must make payments that lower the loan balance by at least a dollar in a given year.

■Are graduates spending 30 percent or less of their discretionary income on loan payments? This test seeks to ensure that loan payments are not eating up too much of the money left after graduates pay for basic needs.

■Are graduates spending 12 percent or less of their total income on loan payments? This standard, related to the previous test, establishes that loan bills should not consume more than about an eighth of total earnings.

Programs that pass any of the three tests would retain eligibility to participate in federal aid initiatives, enabling qualified students to secure federal grants or loans.

The gainful-employment rule was among more than a dozen Duncan proposed to target perceived abuses in a sector where, critics say, regulation had gone lax.

In draft form, the rule would have yanked federal aid the first time a program failed the three tests.

With the new grace period, the final rule moves back the date when deficient programs could lose funding, to 2015.

“This should be a perfectly reasonable bar and one that every for-profit program should be able to reach,’’ Duncan said. “But if you get three strikes over four years, then you’re out.’’

Schools that operate for profit — from cosmetology institutes to universities with medical and legal degrees — have grown from 4 percent to 10 percent of full-time college enrollment since 2000, the College Board said.