THE BLOG
10/10/2013 02:13 pm ET Updated Jan 23, 2014

Arne Duncan's Last Best Chance to Save Students From Abusive For-Profit Colleges

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After several years of startling revelations about its predatory abuses of students, the for-profit college industry faces growing skepticism from the public. Thousands of students across the country have complained that they were deceived by for-profit college recruiters about the cost of programs, the quality of programs, and the value of  for-profit degrees in the job market. Former staffers have come forward to discuss a boiler room culture where recruiters were driven to put "asses in classes" and cash student financial aid checks regardless of whether a student would actually benefit from the program. Industry share prices have plummeted, as big for-profit college companies such as EDMC, Kaplan, Corinthian, Career Education Corp., ITT Tech, and the University of Phoenix have faced investigations over alleged lying to students, lying to regulators, and other misconduct.

At least 32 state attorneys general, as well as a range of federal agencies, from the Securities and Exchange Commission to the Consumer Financial Protection Bureau to the Department of Justice, are probing these schools, which take some $32 billion a year in federal aid. President Obama himself has weighed in emphatically, with a powerful 2012 speech asserting that some for-profit colleges were acting in an "appalling" and "disgraceful" manner, "trying to swindle and hoodwink" veterans and other prospective students. The President made equally charged off-the-cuff remarks in August.

But the main federal agency charged with regulating this industry is the Department of Education, which, under Secretary Arne Duncan, has struggled both to issue meaningful new rules and to enforce existing rules. Now, with a new round of rule-making on its so-called "gainful employment" regulation, the Department has perhaps its best opportunity  to act. But the window is rapidly closing for new Obama Administration initiatives. If the Department of Education doesn't rise to the challenge this time, and start doing better at enforcing the rules already on the books, millions more students may end up duped by false promises from for-profit colleges, and end up deep in debt, their futures destroyed.

Not everyone in the for-profit college industry is doing harm. There are good programs and honest operators genuinely working to train students for careers. Those people and institutions should welcome reforms that would direct federal aid to their programs, rather than giving so much of it to predatory scam schools.

The harms caused by the current shameful situation go beyond ruined lives of students and wholesale swindling of taxpayers. A study released this week by the Organization for Economic Cooperation and Development shows that Americans badly trail people in other developed nations in the technical skills needed for today's jobs. Our country's economic future is imperiled when so much money -- 25 percent of all U.S. financial aid -- goes to a sector dominated by weak, overpriced programs, when we could be investing more in innovative efforts to train workers for careers. The Department of Education needs to do everything it can to remedy this problem.

Today's disastrous state of affairs is in large measure the fault of the Bush Administration, which actually loosened accountability measures and created incentives for an intense race to the bottom -- the more you deceive, abuse, and shortchange students, the more taxpayer dollars you can haul in. (A number of Bush Department of Education officials later became lobbyists for for-profit colleges.)

The Obama Administration undertook  to change the rules, so schools would instead be motivated to serve students well, or else lose federal dollars. But changing the rules has proved to be an enormous challenge, because federal aid has made the for-profits so wealthy that they, as Senator Dick Durbin (D-IL) has said, "own every lobbyist in town." These hired guns, ranging from former Senate Republican leader Trent Lott to longtime Obama advisor Anita Dunn, have pressured the Administration, and pressured Congress to pressure the Administration, to water down its reforms.

The Gainful Employment Rule

The Department's failures, thus far, to impose accountability on bad actors was once again made plain last month when the Department began a new round of "negotiated rulemaking" on its proposed gainful employment rule. The rule aims to at last put teeth into a long-standing congressional mandate that federal funding should only go to those career education programs that actually "prepare students for gainful employment in a recognized occupation." The Obama Administration has sought to implement this requirement through a rule that would cut off federal student aid to for-profit college and career training programs that consistently leave students unable to pay down their student loans.

After intense industry lobbying, the Administration in 2011 issued a heavily weakened version of the rule it originally proposed. The gutted rule would have removed a career training program, whether at a for-profit, non-profit, or state school, from federal aid eligibility only if it failed all three of these tests three years in a row: (1) at least 35 percent of former students are repaying their loans (defined as reducing the loan balance by at least $1); (2) the estimated annual loan payment of a typical graduate does not exceed 30 percent of his or her discretionary income; and (3) the estimated annual loan payment of a typical graduate does not exceed 12 percent of his or her total earnings.

These tests seem ridiculously lenient -- if two-thirds of your former students can't pay back their loans, should taxpayers keep funding your "career" college? So, not surprisingly, many higher education advocates denounced this final formulation of the rule as a sellout to industry. But some of us were willing to give the rule a chance, believing that, in concert with other measures to curb this industry, the gainful employment regulations might make a difference.

Data released by the Department of Education last year under a test run of the gainful employment rule show that the rule, once implemented, could have had some real bite: 65 percent of the programs failed at least one of the three minimal tests aimed at protecting students, and five percent-193 programs at 93 different for-profit colleges-failed all three tests. And, in fact, the rules appear to have now played a role in pressuring some for-profit colleges to moderate their bad behavior -- shutting down some of their worst programs, curbing their ever-escalating tuition charges (including at perennial over-chargers University of Phoenix, EDMC, and Bridgepoint), declining to admit some students who have little chance of succeeding in a given program, and offering students trial periods before finally depositing their government aid checks.

But the for-profit colleges were not done trying to defeat the gainful employment rule. Their trade association, APSCU, used our tax dollars to hire one of the most powerful and expensive law firms in America, Gibson, Dunn, and Crutcher, which sued and convinced a federal judge to strike down the regulations. The judge agreed that the Department had the power to act against programs that were not helping their students earn a living, but he found that it had not provided a clear enough rationale for one aspect of the rule.

So the Department launched this latest round of negotiated rulemaking, unveiling a new draft proposal that is slightly tougher than the previous rule, and bringing to the table representatives of students, consumer groups, business, and colleges and universities, including the for-profits. The discussions in the first round were wide-ranging and often contentious. Although the for-profit college negotiators on the panel come from relatively responsible and reasonable education companies, the likelihood that these negotiators will reach consensus on a new set of rules is slightly lower than the odds of President Obama and Ted Cruz agreeing on a new federal budget this week. (My take on first round of meetings -- Sept 9 - 11 -- is on Twitter, and Ben Miller has a much better summary.)

So, after another round of negotiation discussions (likely to be delayed by the government shutdown), the Department will have to decide what the rule will be. There are a number of ways the Department could set up the rule, but the bottom line should be a tough standard that adequately screens career programs for suitability for federal student aid, and promptly removes programs that are leaving significant numbers of students deep in debt.

The Need for Better Enforcement

Beyond the new rule, the Department must do more to protect students and the taxpayers' investment in higher education. It must effectively enforce not only gainful employment, but existing rules, including (1) the cohort default rate rules (CDR) that remove from federal aid eligibility those schools whose students default on their loans in high numbers; (2) the 90/10 rule that bars colleges from obtaining more than 90 percent of their revenue from federal aid; and (3) the prohibition on colleges engaging in "substantial misrepresentation" about program costs, placement rights, and other issues.

In a recent memo to some colleagues, Robert Shireman, who previously served as Deputy Undersecretary of Education in the Obama Administration and was a leading advocate for accountability measures, outlined the Department's enforcement shortcomings. Shireman's bottom line: "The Department needs to stop pussyfooting around and instead embrace its enforcement responsibilities."

Within the Department of Education, higher education enforcement is the responsibility of the compliance unit of the Office of Federal Student Aid (FSA). As Shireman notes, over the summer the Department's Inspector General reported that FSA takes the position that it has no authority to use for oversight purposes the reports that schools make to the Department on their expenses. This narrow view is a strong indicator of FSA's overall reluctance to get tough on bad actors.

Shireman told me that FSA "should be taking these numbers and raising questions about whether colleges are violating 90/10 or CDR, or gaming them in a way that should lead them to alert consumers to questionable conduct." The Department's supposed enforcers, Shireman says, act as if they "can't do anything unless there's so much illegality that people should go to jail, so they end up doing nothing at all." Shireman also notes that the FSA makes its job more difficult by "hoarding" the compliance documents submitted by schools (releasing them only upon a Freedom of Information Act Request), rather than making them widely available to the public. FSA also could better share information with other government agencies, so that, for example, the Federal Trade Commission would know more about student complaints of misrepresentation, the Department of Veterans Affairs would know if veterans are taking out student loans when they could be using veterans benefits, and state attorneys general investigating fraud would know how many residents of their states are enrolled in out-of-state online programs.

The Department's apparent lack of enthusiasm for enforcement is particularly worrisome given the growing evidence that for-profit colleges are gaming the system to technically comply with the regulations in place.

The purpose of the federal 90/10 rule is to keep federal aid away from schools on which almost no students would spend their own money, and that almost no outside scholarship fund would support. Some public attention has been focused on efforts by for-profit colleges to evade this 90-10 rule by relentlessly recruiting U.S. troops and veterans, who receive military education benefits that, through manipulation by for-profit college lobbyists, somehow count toward the 10 percent non-federal aid measure. (House Republicans whose campaigns are funded by for-profit colleges are now angling to defeat Senate legislation that would correct this travesty and count military money as federal money.) But it appears that for-profit colleges may also be engaged in merging campuses to accomplish the same aim, and keep federal money pouring into their coffers. In one extreme example, EDMC, the second largest for-profit college businesses, last year designated a Canadian college that it owns as a satellite campus of one of its U.S. colleges located 1500 miles away across the border; since most of the students there are Canadian and thus not eligible for U.S. federal aid, the merger improved the 90/10 ratio.

Last month, the Education Department released data on 90-10 ratios for individual for-profit colleges. Some of the schools that flunked were owned by troubled Career Education Corporation and by ATI, which was recently forced to shut down entirely to settle fraud charges brought by the Justice Department. But for the second year in a row, the Department did not publish 90/10 data for one of the most predatory companies, Corinthian Colleges. In 2012, the Department said it had omitted that information from the data release because Corinthian was disputing the Department's calculation of its 90/10 ratios, but the Department said it would address the dispute and post the rates. It apparently never did.  It is now possible that some Corinthian schools have violated the 90/10 rule for two straight years and thus should be ineligible for federal aid, but we just don't know, because the Department appears to have failed to enforce the law. This omission is particularly troubling because the Securities and Exchange Commission is currently investigating Corinthian regarding matters including the company's 90/10 rule compliance.

The situation is just as worrisome with respect to student default rate requirements. In summer 2012, the non-profit group the Institute for College Access and Success (TICAS) (which provides some support for my own work), released a memo collecting evidence that major for-profit colleges are "artificially keeping their cohort default rates below the thresholds" for losing their eligibility for federal aid. Schools were pressuring students to put their loans into "forbearance" status, meaning the loan was technically not in default, but interest continued to mount. As with 90/10, schools also appeared to be combining multiple campuses into a single reporting unit in order to mask the disqualifying default rate of one of them. TICAS asked the Education Department to investigate. A year has passed, and last week, the Department released the latest default rate data; the research firm Height Securities promptly expressed the view that for-profit colleges continue to engage in heavy default rate manipulation.

During the gainful employment rule-making session, Department officials had floated the idea of creating a program-level default rate requirement, which might be harder for for-profits to manipulate; this could be a positive development if the Department follows through. But for now, the Department does not appear to be prioritizing the issue of for-profit colleges gaming the system to avoid getting kicked out for excess student loan defaults.

Finally, the Department of Education has on the books detailed regulations that give it the authority to end or limit a school's eligibility for student financial aid if the school engages in substantial misrepresentation about its programs, costs, or job placement capacities. Yet there is little sign that the Department actively enforces these rules, while other federal agencies, state AGs, and plaintiffs' lawyers across America are actively pursuing misrepresentation cases based on compelling evidence.

The for-profit college industry remains defiant and indignant about efforts to hold its schools accountable before dispensing the federal money to which these corporations apparently feel perpetually entitled. If the Obama Administration fails to sustain its reform effort, the worst schools will be able to sustain their predatory ways, perhaps for another generation. (Mitt Romney's and John Boehner's financially-sweetened embrace of the industry suggests that a new GOP White House would again allow rampant abuse of our tax dollars.)

The Department of Education is the guardian of the precious taxpayer dollars set aside to advance educational opportunity for low- and middle-income students. If Secretary Duncan and the Department are to protect that investment, truly help students to train and build careers, and build a stronger economic future for America, they must get tougher on violators of the rules, and stop allowing money to flow freely to reckless predatory companies.


This article also appears on Republic Report.

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