For-profit colleges reject the Obama administration's regulation as unacceptable. Obama hampers for-profit colleges

The Obama administration on Friday took an aggressive step to crack down on for-profit career training colleges, proposing a regulatory regimen that could shut down hundreds of degree programs — enrolling a million students in fields ranging from accounting to air-conditioning repair — for failing to place graduates in well-paying jobs.

The administration framed the move as a bold step to protect Americans from predatory institutions that leave students with high debt and few marketable skills. For-profit colleges, however, rejected the regulation as an unacceptable — and possibly illegal — federal intrusion into the private sector. Some Republicans in Congress weren’t happy, either.


James Kvaal, deputy director of the Domestic Policy Council at the White House, described the regulation as part of President Barack Obama’s campaign to make 2014 “a year of action,” with or without congressional support.

In fact, the administration has been working on the rule, known as the “gainful employment” regulation, for five years. A previous version was blocked by the courts. Analysts who have been tracking the issue closely said another lawsuit over the latest draft is all but inevitable. And the latest draft contains a clause that indicates the administration is anticipating legal complications.

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Education Secretary Arne Duncan said the complex regulation has a simple goal: “We want to protect students from enrolling in poorly performing programs that leave them with debt they cannot pay and a degree they cannot use.”

Duncan noted that most of the programs in question receive nearly all their revenue from the public treasury, in the form of federal loans and grants that students use to pay tuition. The colleges, he said, are therefore “failing both students and taxpayers.”

But Steve Gunderson, president of the Association of Private Sector Colleges and Universities, warned that the regulation would deny millions of students the chance to enroll in career training programs of their choice. “The government should be in the business of protecting opportunity, not restricting it,” he said.

Even before the draft was released, Gunderson made clear he would fight back. He sent Duncan a five-page letter outlining his concerns — and copied in two top presidential advisers, Valerie Jarrett and John Podesta.

The regulation would apply to about 8,000 career training programs at all types of institutions — community colleges, state universities and for-profit colleges. But for-profit colleges would bear the brunt of the sanctions because they offer the vast majority of the degree programs that would be rated as poor-performing under the administration’s formula. The federal government annually extends about $22 billion in federal loans and $7 billion in grants to students attending those programs.

The for-profit industry includes giants such as the University of Phoenix, DeVry University, Corinthian Colleges and Education Management Corporation. Their programs, offered both online and in-person, train students for a wide range of careers, including crime-scene investigator, graphic artist, physician’s assistant, IT specialist, business administrator, hair stylist and many more.

The draft rule ties data to specific programs. For example, the Los Angeles Film School’s certification in film and video has the worst debt to earnings ratio in the country at almost 55 percent of $17,411.

Barmak Nassirian, director of Federal Relations and Policy Analysis for the American Association of State Colleges and Universities, found the administration’s high hopes for the proposal overblown. “This regulation falls way short of coming anything close to that … It does nothing to clean up waste, fraud and abuse.”

“It’s a feel-good press release opportunity,” he added.

The Senate Committee on Health, Education, Labor and Pensions spent two years investigating the industry and released a scathing report in 2012 that concluded taxpayers were wasting tens of billions annually because so many students took out huge loans through federal aid programs, yet failed to earn degrees. The investigation, spearheaded by Sen. Tom Harkin (D-Iowa), found that the schools spent millions on marketing and employed armies of recruiters, yet had few support staff to help students stay in school; many who enrolled left after just a few months.

Harkin said he would review the new regulation closely, but based on an initial review, he expressed “serious concerns with this proposed rule’s ability to protect students and taxpayers from costly programs that consistently overpromise and underdeliver.” He called for strengthening the regulation before it is finalized.

Ben Miller, senior policy analyst at the New America Foundation, said the removal of two provisions might weaken the rule.

For programs that lose their eligibility for financial aid under the administration’s proposal, a provision that would have required those programs to repay students is now gone. The administration’s new rule essentially says it’s open to ideas on that front.

And a previous section that requiree capping growth of programs that were about to fail is gone, too.

Overseeing and enforcing this version of the rule will pose a challenge, Miller said, particularly in discerning whether senior officials at institutions are telling the truth about their program certifications.

The new regulation, which would take effect in 2016, would flag programs as weak if their graduates’ average loan payments ate up 8 percent or more of their total earnings or 20 percent or more of their discretionary earnings. They would also be flagged if the default rate for former students exceeded 30 percent.

Any program that failed those tests two out of three consecutive years would face a crippling penalty: The Education Department would refuse to extend financial aid to its students. That would choke off the colleges’ primary source of revenue — and effectively force them to close the targeted programs.

Duncan stressed that programs would have a few years to improve before facing sanctions. “The goal is not program elimination,” he said. “The goal is program improvement.”

But the administration has shown little patience with programs it regards as bad actors. Obama’s new Consumer Financial Protection Bureau is suing one for-profit institution, ITT Education Services, for predatory lending practices.

The administration claims authority to regulate for-profit universities based on a line in the 846-page Hi gher Education Act of 1965. It permits the federal government to extend financial aid to students attending post-secondary programs that “lead to gainful employment in a recognized occupation.”

Shortly after Obama took office, the Education Department decided it was high time to define the term “gainful employment.”

Doing so through the regulatory process allowed the administration to circumvent Congress. That has infuriated some members.

“Once again, the Obama administration is making substantive changes in law without consulting Congress,” said Rep. Virginia Foxx (R-N.C.). “We all agree that substandard schools, whether public, private or for-profit, should face consequences if they fail to provide the education and opportunities they promise, but we are in the middle of re-authorizing the Higher Education Act, and this is a perfect opportunity for the president to work with Congress to find a solution on this complex issue.”

The courts rejected the Education Department’s first gainful employment regulation, finalized in 2011, on the grounds that one of the metrics used to assess the vocational programs was too arbitrary.

Administration officials and attorneys have been working ever since to craft a replacement. They spent months in negotiations with key stakeholders, trying to come up with a regulation that everyone could accept. But those negotiations failed late last year, freeing the department to go its own way. In recent weeks, the Office of Management and Budget has held a fresh round of meetings with interested parties, seeking to answer questions and anticipate concerns.

In the end, however, the administration did not change much from the drafts it circulated during the negotiations.

“All the big picture elements are unchanged,” said Ben Miller, senior education policy analyst with the New America Foundation. “The department is holding fast to its goals.”

The new regulation is stricter than the one shot down in the courts. But Duncan said he was confident it would pass legal muster.

The department has rewritten its formula to eliminate the element the judge found questionable — the rate at which program graduates repaid their loans. Instead, the department will be rating programs based on the “cohort default rate,” or the percentage of students in any given entering class who default on their student loans. That metric has been around for two decades and Congress has used it in statutes addressing other elements of higher education.

Despite that tweak, Gunderson questioned the department’s authority to regulate his industry.

He also warned that the regulation would likely backfire on an administration eager to raise college completion rates for low-income and minority students.

In his letter to Duncan, Gunderson argued that colleges facing federal sanctions would have every incentive to admit only those students most likely to succeed academically and land a solid job immediately. That would likely freeze out many students with rocky academic, financial or work histories — precisely those “who are most poorly served by more traditional educational institutions and therefore most in need of the tailored, flexible and innovative options provided by private sector colleges and universities,” Gunderson wrote.

The colleges he represents serve mostly nontraditional students, age 24 or older. Half of them are parents and almost 40 percent work full time while enrolled, he said. Close to two-thirds are eligible for Pell Grants based on their low incomes.

Gunderson added that he did not understand why vocational programs were being singled out when huge numbers of graduates from other universities also struggle to pay back their student loans.

The administration, however, says special attention to the industry is justified. Though students at for-profit colleges make up only 13 percent of the total higher education population, they account for nearly half of all loan defaults, according to the Education Department. The department calculates that 98 percent of federal loan recipients who are enrolled in low-performing career training programs attend for-profit schools.

Student advocacy groups tell horror stories of young adults, including many military veterans, lured into enrolling in worthless degree programs by aggressive TV advertising and relentless admissions counselors.

“Often, those people who need help the most are left in the lurch,” Duncan said.

To help students make informed decisions, the regulation requires institutions to publicly disclose tuition and fees, graduation rates, student debt and graduates’ earnings. It also stipulates that programs must be accredited and meet state and federal licensing standards to continue receiving federal funds.

The gainful employment regulation, which will be open to public comment for 60 days, is just one of several controversial initiatives the administration is pressing in higher education.

The Education Department is also working on a plan to rate colleges and universities according to metrics that might include how well they serve low-income students; how many incoming freshmen end up earning degrees; and how well their graduates fare in the job market. That proposal has kicked up a its own firestorm of protest from college presidents.