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Obama Administration Caved On For-Profit College Regulations, Insiders Say

Duncan Obama

First Posted: 06/16/11 09:50 AM ET Updated: 08/16/11 06:12 AM ET

A year ago, the Obama administration crafted a set of proposed regulations aimed at limiting abuses by the swiftly growing for-profit college industry.

The initial draft threatened severe consequences for institutions that churned out large numbers of graduates with outsized debts and meager job prospects: Schools would quickly lose access to the multi-billion dollar pool of federal student aid dollars that supplies the vast majority of their profits.

But when the Department of Education delivered the final rules earlier this month, they were substantially weakened from the initial draft, adding a three-year grace period before severe sanctions will kick in -- a major triumph for the industry’s lobbyists and their relentless pressure campaign on the Obama administration.

Those familiar with the deliberations say the industry successfully convinced the Obama administration to soften the rules by sowing fears that a stricter approach would prompt Congress -- also the target of intense lobbying -- to step in and revoke the regulations altogether.

“It’s absolutely accurate to say they caved in to the industry,” said Robert Shireman, a former deputy undersecretary of education, who was involved in crafting the original draft of the regulation. “But I understand the political dynamics of being in an administration and needing to take a step forward in the face of a hostile Congress. The right thing for this issue is for it to survive.”

A Department of Education spokesman declined to comment directly on Shireman’s assessment, but defended the regulation, saying the rules will go a long way toward “Helping programs improve, weeding out bad actors in the industry and protecting the interests of students and taxpayers.”

The industry's lobbying was so well-financed and well-coordinated that it altered the view of what was possible inside the Obama administration: The focus shifted from seeking to craft the strongest rule to instead making do with incremental progress, avoiding the sort of action that would trigger congressional intervention aimed at protecting the industry.

“There was an atmosphere that if the opponents in Congress felt the wind was at their backs, it would not be too difficult for them to take action,” said an administration official familiar with the matter, who spoke on the condition of anonymity because the person was not authorized to speak about the regulation. “In some ways, there is a decision to make: ‘How do you provide a good level of protection for students and ensure that you put a good regulation out there that's not going to get overturned in one congressional cycle?' "

The so-called gainful employment regulations have been at the center of a fierce industry battle with the Obama administration, which has been seeking to rein in abuses in the for-profit college sector since 2009. The rules were designed to gauge whether for-profit and other vocational colleges over-promise and under-deliver to their students.

The Department of Education came up with the rules, but a wide array of different agencies within the White House have been involved in reviewing the regulations, including the Domestic Policy Council, the Council of Economic Advisers, the National Economic Council and the Office of Information and Regulatory Affairs.

The specific changes to the regulations mirrored many of the direct suggestions from the industry, including the addition of a three-year phase-in period before schools could be restricted from federal dollars, and a more lenient consideration of how student loan burdens are calculated.

The sheer force of the lobbying effort can be summed up by a series of 17 meetings between the White House Office of Management and Budget and for-profit college industry representatives in May, before the final regulations were released. By contrast, a coalition of civil rights groups and student advocacy groups that supported tougher regulations on the industry had just one meeting with the administration, according to meeting schedules posted by the Office of Management and Budget.

Federal regulations must undergo a regulatory review process before final publication, which includes an interagency White House review coordinated by OMB’s Office of Information and Regulatory Affairs.

High-profile proprietary college executives at the OMB meetings included Donald Graham, chairman and chief executive of the Washington Post Company, which owns the for-profit Kaplan University, and former Maine governor and Congressman John “Jock” McKernan, the chairman of Education Management Corp. and husband of Sen. Olympia Snowe (R-Maine).

Both McKernan and Graham had meetings with Cass Sunstein, Obama’s top regulatory czar who heads the OMB’s powerful OIRA division, bringing along detailed white papers with suggestions for how to modify the rules to the industry’s liking.

The memo from the Kaplan meeting included several bullet points entitled "Minimum modifications needed to the gainful employment rule." The letter outlined suggestions for a three-year phase-in period to allow colleges to adjust to the rule and a “cure period” to allow schools that don’t meet the minimum standards on student debt to come back into compliance.

Both of those suggestions made it into the final rule released by the Department of Education.

Another memo submitted during a meeting between Education Management Corp. executives and top administration officials suggested the elimination of the Department’s previous proposal to restrict the growth of enrollment at programs that had particularly poor student outcomes. The enrollment caps were eliminated in the final regulation and replaced with requirements to disclose debt levels and require three-day waiting periods before students can enroll in troubled programs.

When the rules were released earlier this month, Education Secretary Arne Duncan said upfront that the department had incorporated many of the criticisms from the industry.

“The new rules are both thoughtful and reasonable, they reflect the great input from the industry, and they are designed to give career colleges every opportunity to reform without letting them off the hook,” Duncan said at the time. “The feedback was extraordinarily helpful. We took it very seriously, and hopefully many folks will see their comments were listened to and acted upon.”

Department officials have strongly defended the changes that require schools to provide increased disclosure to students. James Kvaal, a deputy undersecretary of education, pointed specifically to requirements that schools inform students that they could face difficulty repaying federal loans and could be forced to transfer if the program loses eligibility.

“That’s a pretty powerful message to be hearing from an institution,” Kvaal said. “We also think the three day wait-out period is pretty powerful. We’ve heard reports of high-pressure sales tactics and that is an important concern. It's hard to bully people into making decisions that they might not otherwise make with a three-day cooling-off period.”

Powerful lobbying organizations financed by the for-profit colleges began a relentless public relations campaign earlier this year aimed directly at the Department of Education, accusing officials of conspiring with Wall Street short sellers on the gainful employment regulations.

The Coalition for Educational Success, a lobbying organization funded by Education Management Corp., ITT Technical Institute and other for-profit institutions argued that Department of Education officials were meeting with short sellers in an attempt to harm stocks for the publicly traded college corporations and allow the investors to cash in.

At the request of Sens. Tom Coburn (R-Okla.) and Richard Burr (R-N.C.), the Department of Education’s Inspector General confirmed that she was investigating the informational meetings with short sellers.

Over the past two election cycles, for-profit colleges have boosted campaign donations, particularly to Democratic members and committees. In the 2010 election cycle, political action committees and executives for for-profit college directed two-thirds of their campaign cash to Democrats.

The Democratic Senatorial Campaign Committee, the Democratic National Committee and the Democratic Congressional Campaign Committee all received nearly $100,000 each in donations from the industry, more than double the amount received by Republican fundraising committees.

Beginning in February, Congress began to flex its muscle on the debate over gainful employment. Rep. John Kline (R-Minn.), the newly installed chairman of the House Education and the Workforce Committee, introduced a budget amendment that aimed to block the Department of Education from releasing the gainful employment regulation for the remainder of the fiscal year.

“A strong bipartisan coalition of members of Congress has voiced their concerns to the administration, but those concerns seem to have been ignored,” Kline said in a statement at the time. “Make no mistake: this isn’t just another regulation that will destroy jobs. It is an assault on students’ ability to find an institution that best meets their needs.”

The measure eventually passed the House by a wide margin, with significant support from powerful Democrats, including House Minority Leader Nancy Pelosi (D-Calif.) and Democratic National Committee chairwoman Debbie Wasserman Schultz (D-Fla.).

The House budget bill never came to fruition, but the amendment to block gainful employment resurfaced two months later in April when the federal government was on the brink of a shutdown. House Republicans and Democrats were pushing to block the rules in the final days leading up to the 11th-hour deal, but the amendment was ultimately thrown out during negotiations with the Senate.

Nonetheless, the show of force on the Hill over the past few months was enough to make a difference, say many observers in Congress on both sides of the issue.

“The Republicans were unanimous in their opposition and my colleagues on the Democratic side were not,” said Rep. Raul Grijalva (D-Ariz.), a House Education committee member who was in support of stronger accountability for the for-profit college sector. “That was the fission point that I think helped drive the compromise we saw in the final draft."

“I’m just glad it survived; I really am. Because there were moments that we thought it was going down the drain.”

Shireman, the former Department of Education official, agreed that a pared-down version of the regulation was better for accountability than a strong regulation that could have been stripped away by Congress.

"They still probably made the political calculation they needed to make,” he said. “This is so weak that if Congress overturns it while continuing to pay lip service to the need to protect taxpayers and students, it would be a complete and total outrage.”

While student advocacy and civil rights groups have described the regulation as surrender to the colleges, the industry’s allies in Congress have seen it differently. Kline, the Republican Education Committee chairman, said in a statement that the administration “may have offered some minor changes, but they have failed to adequately address the harmful impact the gainful employment regulation could have on students and the workforce.”

Rep. Edolphus Towns, (D-N.Y.), a member of the Congressional Black Caucus, whose members are split on the issue, argued that the rule would unfairly harm programs that enroll more minority students than traditional public and private non-profit colleges. “I cannot support a rule that has the potential to harm so many vulnerable students,” he said.

Since the rule was released this month, Sen. Jim DeMint (R-S.C.) has introduced an amendment to an economic development bill that would nullify the gainful employment rule. The Senate has not yet considered the bill.

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