Gainful Employment Rule: The Death of For-Profit Colleges?

This past week, Secretary Arnie Duncan, U.S. Department of Education, released the final “Gainful Employment” regulation aimed primarily at protecting college students from incurring large loan debts while getting a college education.  The intent of the final version of the regulation will hold career programs accountable to ensure that their students are successful in getting an education that leads to a good paying job without incurring large debt in student loans.  The new rule will go into effect July 2015 and will have a huge impact primarily on the for-profit colleges who offer career training programs.

The final regulation comes after years of debate, revisions, and litigation.  The first version of the regulation was issued in June of 2011 and had two provisions: 1. The college’s cohort student loan default rate and 2.  The college’s debt-to-earnings ratio for its graduations in a given program.  The two provisions would have negatively impacted career training programs at community colleges and for-profit colleges.  The final version dropped the first provision, the student loan default rate, which was viewed by many as a major win for community colleges who had argued for elimination of this provision.  The elimination of the loan default rate is projected to save as many as 500 programs, most of which are at for-profit institutions.

The gainful employment rule now requires all career training programs, whether at private or public colleges, to prepare students for “gainful employment in a recognized occupation.”  Essentially, the program must ensure that the loan payment of a typical graduate can NOT exceed 20% of his or her discretionary income or 8% of his or her total earnings once the student graduates and gets a job.  Career training programs that exceed these levels will be at risk of losing the ability of their students to access federal student financial aid programs.  At stake is the potential loss of federal funding for financial aid, estimated to be $200 billion.

While students at for-profit colleges represent only 11% of the total higher education population, they account for 44% of all federal student loan defaults, according to the U.S. Department of Education press release issued on Thursday, October 30, 2014.  Additionally, students attending  two-year for-profit colleges can pay as much as four times the cost of attending public community colleges.  More than 80% of the students attending for-profit colleges take out student loans compared to less than 50% at public community colleges.

The Education Department has estimated that, based on their current data, approximately 1,400 career training programs serving 840,000 students would not meet the new regulation.  The press release did not mention how many colleges would be affected, but it did state that 99% of the 1,400 programs are in for-profit colleges.  This is particularly critical for for-profit colleges, since 90% of their revenue often comes from tuition through federal financial aid programs.

However, all programs will have the opportunity to make changes that can help avoid sanctions.  And according to the Department of Education, many colleges have already initiated changes to improve their programs.  Specifically, some colleges have instituted trial periods before their students have to commit. This allows students to decide if the program is a good fit for them.  Others have reduced the length of time to complete their programs and yet others have reduced the cost of their programs.  It should be noted that a few schools have actually closed programs in some locations that were judged to be performing poorly.

Moreover, there is room for improvement in many of these programs, whether they be public or private, for-profit or non-profit.  To encourage improvement, the Education Department is creating an inter-agency task force to help ensure proper oversight of the for-profit colleges.  The task force will include representatives from the Departments of Justice, Defense, Treasury and Veterans Affairs, the Consumer Financial Protection Bureau, Federal Trade Commission, the Securities and Exchange Commission and will even include the attorneys general from each state.  The intent is to leverage each agencies’ resources and expertise in an effort to better protect the interests of students and taxpayers.  The task force began meeting this year and will meet as needed, but at least once each quarter.

Critics of colleges and universities are not happy with the new regulation.  They feel that the Department of Education has watered down the initial regulation that was supposed to protect students who took out loans.  Student and consumer advocacy groups have pushed the Department to include college dropout rates. They feel that the debt-to-earnings provision looks at only students who complete their program and not at the students who failed to graduate or who dropped out.  The concern is that the new rule allows career programs, where most students take out loans but few graduate, to continue using taxpayer money to bury students in debt that they can’t repay as long as they limit the debt to the few students who do graduate.  On the other hand, Education Department officials contend that programs would still be required to report their completion and cohort student loan default rates.  They believe that disclosing this information would help prospective students and their parents understand their chances of succeeding in a given program.

As you can imagine, the for-profit colleges have been very critical of the Department and the new regulation. They claim that the Department has caved in to the pressure of the community colleges while ignoring the concerns of the for-profits.  According to Steve Gunderson, president and chief executive of the Association of Private Sector Colleges and Universities and their main lobbying group, “the gainful employment rule is nothing more than a bad faith attempt to cut off access to education for millions of students who have been historically undeserved by higher education.”

I believe that the U. S. Department of Education is headed in the right direction, but I agree with critics that it didn't go far enough to include a school’s student cohort loan default rate or its student dropout rate.  We have to start somewhere and this is a good start.  We must address the high loan default rate of institutions of higher education.  In times of limited resources, we must make the best use of taxpayer money.  But, rather than close programs based on one single metric, we should offer assistance to those 1,400 programs that are identified as not meeting the new regulation and do everything we can to ensure they will be successful.  If they refuse the help or choose to not make improvements, then after sufficient warnings, the programs should be sanctioned or closed.  One final point, the new regulation does allow sufficient warning in my opinion.  Programs that fail both debt-to-income tests twice in any three-year period or are in the zone for four consecutive years will be ineligible for aid.

College Student Loan Default Rates:A Measure of Success of Colleges?

Recently, more criticism is being leveled at colleges and universities for not being more successful at “producing” students.  Higher education is being treated like any other business by focusing now on measuring output. Specifically, lawmakers and the public want to know how many students each institution of higher education they advance from one year to the next and ultimately how many they graduate.  One measure of that success that has been in the public eye is the college student loan default rate.

The U.S. Department of Education announced this week that loan-default rates had dropped one percent from 14.7% to 13.7% of all colleges and universities in 2011 compared to 2010.  The Department of Education looks at individual colleges and places them in categories such as public vs. private, two-year vs. four-year, and non-profit vs. for-profit.  The largest drop occurred in the private for-profit sector by 2.7%, even though they continue to have the highest loan default rate of all colleges at 19.1%.  The second highest default rate was among public colleges at 12.9%, and the private non-profit colleges had the lowest at 7.2%.  In examining the data more closely, the two-year private non- and for-profit colleges had significantly higher default rates (25.0% and 20.6% respectively) than the two-year publics (13.6%). The private for-profit four-year colleges had the highest default rate (18.6%), the public colleges had the next highest (8.9%) and the private non-profits had the lowest rates (7.0%).

Despite the drop in default rates, the major concern among critics of colleges is that the Department of Education lowered its standards and is letting underperforming colleges “off the hook.”  However, college administrators point to the weak economy as a major cause of higher loan default rates.  The weak economy has caused more student to borrow money to attend college, which in turn has caused the loan default rate to increase. 

Last year, the Department changed its standards, so rather than measuring default rates for two years, they are now using three years.  And the default rate must not exceed 30% of the total number of student loans for three years in a row or 40% in a single year.  Another interesting, but controversial, change the Department made was to exclude in its calculations multiple loans whether students were in “repayment, deferment, or forbearance status for at least 60 consecutive days,” based on a statement issued by Jeff Baker, Director, Policy Liaison and Implementation, Federal Student Aid, U.S. Department of Education.

The penalty for not meeting the standards is the potential loss of federal student aid and possibly other federal funding.  This is a major concern about administrators at colleges as federal student aid funds can be a significant part of the budget of many colleges especially at the private for-profits.  Moreover, administrators in community colleges and minority serving institutions expressed the greatest concern since they typically enroll a significantly larger number of first-generation, low-income students.  These are the students who rely heavily on loans and other types of financial aid since their parents can’t afford to pay for college. 

In a speech this week, Secretary of Education Arne Duncan told leaders of historically black colleges and universities that none of their institutions would be penalized.   This was welcome news for them and for college administrators at other minority-serving institutions and community colleges. 

However, should minority-serving institutions and community colleges be penalized because they serve a disproportionately larger share of low-income students?  I don’t think so, if anything these colleges should be rewarded for taking on a very difficult task.  But, in an environment where legislators and the public are calling for more accountability and where colleges and universities are now being treated like a business that produces a product, I don’t think these institutions of higher education will be rewarded.  My guess is that we will see more pressure on these types of colleges to do a better job or close their doors. 

On the other hand, it is not clear to me that state legislators will have the intestinal fortitude in the future to close public community colleges and minority-serving institutions in their legislative districts.  After all, institutions of higher education are economic engines for the communities they reside in.  They tend to hire a large number of employees and a subset of their employees (professors and administrators) earn significantly higher wages than the average wage earner in those communities.  Additionally, these colleges and universities are educating the future workforce of our country: the first-generation, low-income, minority and immigrant population that is increasing exponentially in this country.  I suspect that if a legislator proposed or voted to close an institution of higher education in his or her community, they would not remain a legislator through the next election.

Secretary Duncan took a bold and brave step, in my opinion, in adjusting the default rates of community colleges and minority serving institutions.  Our country needs these types of institutions of higher education to not only survive, but thrive.  After all, they play an important role in shaping the future of our country by educating a significant subgroup of our workforce and our future leaders. 

The Price of a College Degree. Is it Worth the Price?

For several years now, Americans have been questioning the value of higher education. Is a college degree worth the thousands of dollars it costs? Does the bachelors’ degree lead to a good paying job? Higher education faces many challenges in the nation. Unfortunately, one major challenge is the escalating cost of a college education. And as Americans question its value, the college degree has begun to lose its prominence in the minds of many Americans. The evidence to support this is the decline in enrollments in colleges and universities throughout the country. The problem has been further fueled by the high unemployment rates and the need by Americans for employment and the promise of a steady income.

The National Center for Education Statistics reported that there was a 2% drop in the enrollment of undergraduates in colleges and universities across the country from 2010 to 2012. Additionally, the U.S. Census Bureau reported a decline in college enrollments in the fall of 2012 by half a million students compared to the previous year. According to Census Bureau data the biggest drop was among older students, those 25 and older, and among white students who saw a decline from 67% to 58%. Surprisingly, Hispanic and African American students did not follow the trend, but rather their enrollments increased during the same period, from 11% to 17% for Hispanics and from 14% to 15% for African Americans. More recently, the Chronicle of Higher Education related that college enrollments this past spring semester decreased by 0.8% for the third year in a row. This is compared to a 2.3% decline over the previous one year period. The biggest drop, 4.9%, occurred among four-year for-profit colleges compared to 9.7% decline last year, and at two-year public colleges, which fell by 2.7%. Thirty-seven states saw enrollment declines, while 13 states reported increases.

One logical assumption is that the drop in college enrollments was precipitated by the number of high school graduates not going on to college. The U.S. Department of Labor reported that indeed fewer high school graduates were going on to college last year: 65.9% in 2013 versus 66.2% in 2012. The drop; however, was only 3 tenths of one percent. While this is minimal, it does not account for the larger drop in college enrollments.

Today, the public and politicians expect colleges and universities to provide an education that leads immediately to a good paying job. College administrators can no longer expect students and parents to incur debt to fund an education that in many instances leads to uncertain career opportunities. Higher education has been steadily pricing itself out of the market in the minds of Americans. Data from the National Center of Education Statistics indicate that the cost of college (tuition, fees, and room and board) rose 40% at public institutions of higher education and rose 28% at private non-profit institutions during a ten-year period, 2002 to 2012. According to an August 15, 2012 Bloomberg article, “college tuition and fees have surged 1,120%… since 1978, four times faster than the increase in the consumer price index.”

Nationwide, colleges and universities have gotten so expensive creating a perception that the pursuit of higher learning is no longer as valuable as in past years. U.S. News and World Report, in a recent article, suggested that while tuition prices at public four-year colleges are growing more slowly than they have in more than 30 year, the fact remains that tuition has dramatically outpaced other consumer goods. For example, from 2003 to 2013 college tuition grew nearly 80% while Medicare grew 43.1%, Food and Beverages 31.2%, Housing 22.8%, Men’s Apparel, 6.9% and Women’s Apparel 5.6%, as compared to an increase in the Consumer Price Index of 26.7% during the same ten-year period.

The dramatic increase in college costs has been due in large part to the recession and a weak economy, both at the state and national levels; dramatic cuts in state funds to public higher education institutions; and drops in enrollments, due to the scrutiny of the value of higher education. Inside Higher Ed recently reported that there has been a 7.6% drop in state appropriations for colleges in 2012, the largest decline in a half a century. Forty-one of the fifty states cut their spending for higher education from as little of 1% in Indiana to as much as 41% in New Hampshire. In the last five years spending by states nationwide is down 28%. All but two states, North Dakota and Wyoming, cut funding for their institutions of higher education. Thirty-six states cut higher education funding by more than 20%, eleven states have cut funding by more than one-third, and two states, Arizona and New Hampshire, have cut their higher education spending in half. At the federal level, budget cuts have impacted research programs, student support and financial aid programs and many other programs that support students who attend our institutions of higher education.

In response to these budget cuts, colleges and universities have raised tuition to make up the difference. Over the last 25 years, the share of public university revenues coming from tuition and fees has climbed steadily to 47% this year, from 23% in 1987, according to a March 6, 2013 article in the New York Times. Moreover, college administrators, due mostly in response to pressure coming from legislators and governors, have begun to freeze tuition and fees, a move that unfortunately is not sustainable, given that the other costs of doing business will not freeze. As colleges raise tuition costs, the anticipated effect is a potential drop in enrollments. To ameliorate this effect, colleges have discounted tuition by providing scholarships and other forms of student financial aid, a practice that private, high-priced institutions have followed for many years. But rather than adjusting to a new model of doing business when the economy starts to recover, the reliance on tuition revenue has created a "new normal" for higher education funding that is simply not sustainable.

Many Americans have begun to believe that a bachelor’s degree is now the financial equivalent to a high school diploma of ten years ago. However, the most important message that must be disseminated is that with a college degree, graduates are more likely to obtain higher quality and more well-paying jobs. According to College Board, college graduates with bachelor’s degrees have a 61% higher earnings potential than high school graduates.

Historically, higher education was originally created in Greece in the sixth century BC to impart knowledge to the elite and the clergy. It later expanded to medicine, philosophy, mathematics and the study of the nature of humanity and the universe. Through the centuries, higher education has maintained the imparting and expanding of knowledge as one of its primary functions, but what has changed is the characteristics of the students. Today, higher education prepares individuals to think critically, analyze, and draw conclusions to solve problems in an ever increasing global society. Liberal arts degrees, for example, teach these skills, yet a bachelor’s degree in liberal arts does not lead immediately to a high paying job. Therein lies the dilemma for higher education. Does higher education continue to educate students with a centuries old model or does higher education change to meet the needs for our society?

The dilemma institutions face, as they continue to raise tuition and fees at record levels, is that attendance will become out of reach for an increasing number of students, especially minority, first-generation, low-income students, which will diminish dramatically their chances of completing a degree. Horace Mann, the great education reformer of the 19th century, once said, “Education … is the great equalizer…” I am a perfect example of this phenomenon.

One of the primary assumptions in our society is that a higher education degree leads to a good paying job. However, not all college degrees lead to an immediate career and a good paying job, yet increasingly the public and more specifically politicians are expecting colleges to produce larger numbers of job-ready graduates. The challenge facing higher education is to move away from the ancient model of educating for enlightenment and changing the paradigm to meet the needs our society in the 21st Century. College and University presidents, particularly in the public sector, must get together and re-invent the university for the 21st Century. If not, students will vote with their feet as they are starting to do now.