Federal Proposal Could Jeopardize For-Profit Programs, Especially Bachelor's Degrees

Nathaniel Brooks for The Chronicle

Nancy Kyer is studying to become a licensed practical nurse at Mildred Elley School, a for-profit institution in Albany, N.Y., which fears a proposed federal regulation could imperil its programs.
May 17, 2010

Mildred Elley, a two-year proprietary college that opened its doors in Albany, N.Y., in 1917, prides itself on helping people get back to work. But Faith A. Takes, the college's owner and president, fears that a new federal proposal that would evaluate for-profit colleges by comparing their students' borrowing to their graduates' earnings will jeopardize her college's high-demand nursing, medical-assisting, and information-technology programs at the very time more adults are turning to the institution for training.

The U.S. Department of Education is expected to unveil its plan in the next few weeks, and for-profit colleges like Ms. Takes's are scrambling to squash the idea. Administrators at those institutions say the department's proposal would force for-profit colleges to shut down educational programs.

Programs in nursing, engineering technologies, and culinary arts are among those that could be affected because graduates in those fields may not make enough to satisfy the department's proposed debt-to-earnings ratio. Bachelor's-degree programs, experts say, would be most at risk because students in those programs tend to borrow more than students in shorter-term ones.

Officials at DeVry, Kaplan, and Keiser Universities all agree that the department's proposal could seriously jeopardize their bachelor's-degree programs.

"The bachelor's degree as we know it would be gone," said Arthur Keiser, president of Keiser University, which is based in Florida.

The department has said its goal is to crack down on colleges that overcharge and underdeliver in training students for jobs right after graduation. Education Secretary Arne Duncan has said that former students of vocational programs have reported that they were enticed into poor-quality programs and are now saddled with loads of student-loan debt they can't repay because they have no jobs.

Mr. Duncan wrote in a recent opinion piece for AOL News that the problems afflict only a small minority of vocational and career programs. But, he added, the problems "will fester unless steps are taken to protect students and taxpayers."

Defining a Rule

The Higher Education Act of 1965 requires that proprietary and vocational colleges, other than those clearly designated as "liberal arts" and vocational programs not designed to lead to a degree, provide "an eligible program of training to prepare students for gainful employment in a recognized occupation." Compliance with the rule is a condition for those colleges' students to be eligible to receive federal financial aid.

The rule took on more prominence in the late 1980s, when it was used to fight problems that arose after some for-profit colleges were found to be recruiting near welfare offices, low-income housing complexes, and homeless shelters. The colleges enrolled ill-prepared students who brought with them thousands of dollars in federal loans and grants that the colleges received upfront as payments for tuition.

The for-profit sector's most-egregious abuses may be behind it, but problems persist. The sector continues to be called out on its high tuition costs, and the average default rate of borrowers who attended for-profit colleges, 11.9 percent, is higher than that of students who attended public colleges, which averages 6.2 percent, or private, nonprofit colleges, at 4.1 percent. Aggressive recruiting practices continue to plague the industry, an issue highlighted in a recent PBS television documentary. In fact, the University of Phoenix settled a lawsuit last year that accused the university of improperly compensating its recruiters, in violation of laws governing federal student aid.

The department's attention to the sector has a lot to do with its fast growth, too. Enrollment in the nation's nearly 3,000 for-profit colleges has grown faster than in the rest of higher education, by an average of 9 percent per year over the past 30 years. For-profit institutions now educate about 7 percent of the nation's roughly 19 million students who enroll at degree-granting institutions each fall.

The higher-education act does not currently define "gainful employment" as described by the proposed rule. So the Education Department set out to do that late last year, convening a panel that included consumer advocates, for-profit-college officials, and student advocates to re-examine the rule. Because the panel could not agree on a gainful-employment definition, the department is now free to propose its own.

The department has not yet finalized its proposal, but officials are considering requiring that a program's students do not take on loan payments that exceed 8 percent of graduates' expected earnings based on a 10-year repayment plan and Bureau of Labor Statistics earnings data.

The rule would apply to programs at proprietary colleges and any institution with programs less than two years in length. Under proposals the department has floated, programs that exceed the 8-percent limit could still be eligible for federal financial aid by showing that their graduates' true earnings were higher than the government averages or that 90 percent of all graduates repaid their loans; by documenting that students have at least a 75-percent repayment rate on federal loans; or by demonstrating a program-completion rate of at least 70 percent and a 70-percent job-placement rate.

Last month analysts at Credit Suisse reported that the department was considering lowering the completion rate to 50 percent. However, it is unclear exactly which exemptions, if any, will be part of the department's final proposal.

The department is expected to release its final draft in the next few weeks, which includes 13 other rules related to for-profit colleges, with public comment to take place over the summer. Final rules will be set by November and go into effect in July 2011.

What's the Problem?

For-profit-college officials and their supporters say they are not clear what the department is trying to accomplish through the proposed gainful-employment regulation. If the department wants to regulate the sector's "bad actors," the proposal may do more harm than good, the advocates say. It may shut down some unscrupulous colleges, but it may also eliminate worthy programs and leave students without a college to attend.

As part of its lobbying efforts, the for-profit sector is throwing around large numbers about how many programs and students would be affected by the change. But there are no good estimates of what the impact will actually be.

One study at the center of the debate was commissioned by the Career College Association, which represents 1,400 colleges, most of them for-profit. That study, conducted by a professor of economics at the University of Chicago and a consulting company, was based on data from about 10,000 programs enrolling more than 640,000 students. It found that 18 percent of the programs, enrolling one-third of the students, would not pass muster under the proposed rule.

Although a report on the study notes that the programs evaluated were not necessarily representative of the range of programs offered by for-profit colleges, the report's authors projected the impact of the rule, assuming that it would affect one-third of all students who enroll at for-profit institutions each year. Using that assumption, and historical trends on enrollment growth for the sector, the Career College Association has argued that the rule could eliminate programs for 360,000 students by next year, and a total of more than 5.4 million by 2020.

Supporters of the rule view the study findings differently, arguing that they show that only a minority of programs would even be affected and that the proposed rule wouldn't necessarily mean the end of the students' chance to pursue higher education because they could enroll in different programs that might result in their earning higher wages, or find colleges where the tuitions costs, and debt, are not as high.

If the department's aim is to curb excessive student debt, for-profit college officials say, then it should deal with individual students rather than propose a rule that would affect large numbers of students across an entire sector of higher education.

"The department assumes that every institution with a high debt-to-income ratio among its students is a bad actor," says Harris N. Miller, president of the Career College Association. "That's unfair."

The department's plan, he and others say, will ultimately limit access and student choice, which runs counter to President Obama's call to increase the number of Americans with college degrees. Other supporters of for-profit colleges accuse the department of using the rule-making process to try to regulate tuition at for-profit colleges. For the 2009-10 academic year, average tuition and fees range from $7,020 at public four-year colleges to $14,174 at for-profit institutions and $26,273 at private nonprofit colleges, according to the College Board.

Because salaries for a given occupation vary regionally, programs of equal cost and quality in different locations may have different abilities to meet the 8-percent threshold. For-profit colleges also have limited control over how much loan debt a student takes on and cannot stop students who agree to take on thousands of dollars in loans if they are eligible for those amounts.

"Our hands are tied," said Ms. Takes, of Mildred Elley, which has campuses in New York and Massachusetts. "But we are the ones being held responsible."

For-profit colleges have complained that the department is focusing on the sector without examining the huge amount of debt that students, especially those studying the liberal arts, incur at nonprofit colleges.

Mark Kantrowitz, publisher of FinAid, a Web site that provides student-aid advice, said that if the department is serious of about curbing excessive student debt, then all of higher education should be subjected to the federal proposal. In fact, he says, nonprofit colleges should be worried because some have graduation rates in the single digits and it's an open question whether they are providing value for the money students are spending. He said nonprofit colleges should not be surprised if they become the department's next focus.

Among 2007-8 bachelor's-degree recipients who borrowed, median debt was about $17,700 at public, four-year colleges, $22,380 at private, nonprofit colleges, and $32,650 at for-profit institutions, according to the College Board.

"A lot of theater-arts students rack up thousands of dollars of student-loan debt," he said. "No one can pay that back waiting tables."

Focus on the For-Profit Sector?

Pauline M. Abernathy, vice president of the Institute for College Access and Success, a California-based nonprofit group that advocates for affordable higher education, dismissed the idea that the department is out to get the for-profit sector. She says that community-college work-force programs would also be affected by the department's proposal.

But unlike its for-profit counterpart, the two-year and technical-college sector welcomes the department's proposal. Both the Florida College System Council of Presidents and the National Alliance of Community and Technical Colleges have written letters to Mr. Duncan supporting the department's efforts to define gainful employment. The council called the proposal a "fair measure that will help prevent students from borrowing more money than they could realistically repay, given the expected starting salary in the occupation for which they trained."

Susan M. Lehr, vice president for government relations at Florida State College at Jacksonville, a two-year college, said the benefit of the department's proposal is that it allows institutions to get a better handle on which programs are producing students who can earn enough money to support themselves.

"They come to us for gainful employment. That's the whole point," she says.

Ms. Lehr, who usually works on state rather than national education policy, got involved with the federal gainful-employment issue because, she says, she has seen firsthand the devastation left behind when students graduate from a for-profit with huge debt and no job. "They usually end up coming to our college for help," she says.

Many higher-education officials and analysts say that Robert M. Shireman, deputy under secretary of education, is the driving force behind the proposal. Mr. Shireman, who did not return numerous calls and e-mail messages seeking comment on this story and who will be leaving his post at the department this summer, has long advocated for reform of student-borrowing policies and increased protections for borrowers. Before joining the department, he was president of the Institute for College Access and Success. During his tenure, the nonprofit group brought public attention to the issue of rising student debt, prompting Congress to adopt income-based repayment options for federal student loans.

Higher-education analysts say he is not interested in waiting for the next reauthorization of the higher-education act, which is not scheduled to come up until 2013, to make sure that federal student-aid money is used properly.

At a recent address before the National Association of State Administrators and Supervisors of Private Schools, Mr. Shireman acknowledged the efforts of the for-profit sector to meet the "critical demands from people out there who need higher education." However, he also made it clear that the colleges need to be good stewards of the federal money they receive.

The Career College Association has offered its own gainful-employment proposal, which focuses on expanding required disclosures to prospective students. Students would be informed of the consequences of taking on too much debt and be required to sign a document stating that they understand the risk. The association's plan would also require programs to prove that they prepare students for employment by vetting the programs with employers in the field and making sure students are better prepared to pass licensure and certification tests.

When asked about the association's alternative proposal last month, the department issued a written statement saying it was "pleased that many participants in the program community have expressed views and presented information in this important area." The statement went on to say that the department looks forward to the association's comments on the draft the department proposes.

However, it is highly unlikely that the department would abandon its own proposal in favor of a disclosure-only rule as suggested by the association.

Much-Needed Money

Michael Gutierrez, director of the for-profit Bryant & Stratton College's campus in Albany, N.Y., said the Education Department's proposal only considers what a student will earn in the early years after graduation for the purposes of repaying loans. That overlooks the fact that graduates will probably earn more in their careers over time and the value of their education will multiply, Mr. Gutierrez said.

He said he was concerned that some of his college's popular programs, such as those in medical assisting, criminal justice, and business, could be in jeopardy if the Education Department's plan takes effect. Job-placement rates in those programs are about 90 percent, he said, but starting salaries are often low and many students will have borrowed more than 8 percent of their initial earnings. For example, annual tuition in the medical-assistant program is $7,335, and the starting salary in that field is about $24,000 a year.

The proposal would basically force colleges to either lower tuition or get rid of some programs, he said.

The main revenue source at for-profit colleges is tuition. So if revenue per student drops at a career college, which it will if tuition must be reduced to meet a debt-to-income ratio, it would likely lead to cuts in programs and student-support services, said Mr. Miller, of the Career College Association.

For-profit-college officials have long argued that the many nontraditional students their colleges enroll need to take out loans to pay for tuition and living expenses. Their students tend to be older than traditional students and are often low- to middle-income working adults with families. Few have the luxury of dipping into their parents' coffers.

Nancy A. Kyer, of Schaghticoke, N.Y., has worked as a medical secretary for 30 years. After her employer cut her hours last year, she decided to enroll in a licensed-practical-nursing program at Mildred Elley. She wanted to make sure she had job security for the future. Ms. Kyer, who is 52, said she investigated other programs before selecting the proprietary school. She liked the program's flexibility because it allowed her to keep her day job while attending evening classes.

Ms. Kyer's 54-credit program will cost a total of $19,116 in tuition, and she expects to graduate with more than $15,000 in loans.

"Is it a risky thing to do? Maybe," said Ms. Kyer, who expects to finish her studies early next year. "But everybody should have the opportunity to further their education."