Senator Takes Aim at For-Profit Colleges' Reliance on Federal Money and Aggressive Recruiting of Veterans

January 22, 2012

U.S. Senator Richard Durbin will introduce a bill on Monday to clamp down on for-profit colleges' heavy dependence on federal funds and curtail what he called "the powerful incentive" the colleges now have to aggressively recruit military students and veterans.

In the partisan climate of Congress, the bill, aimed at a federal regulation known as the 90/10 rule, has slim chance of passage, but it highlights the stakes. If enacted today, the measure would probably bar the University of Phoenix and many other institutions, including colleges owned by Corinthian Colleges Inc., Bridgepoint Education, and at least six other giant college companies, from participating in the federal student-aid programs that are their lifeblood.

Senator Durbin, an Illinois Democrat, will announce the measure at a hearing in Chicago with veterans and active-duty military members who say they have been victimized by aggressive for-profit college recruiting.

The hearing will also feature Hollister K. Petraeus, assistant director of servicemember affairs at the new Consumer Financial Protection Bureau, who has been a visible and influential critic of colleges that take advantage of service members. (Ms. Petraeus is the mother, sister, daughter, granddaughter, great-granddaughter, and spouse to servicemembers, and former director of the Better Business Bureau Military Line.)

The legislation would modify the 90/10 rule and a few of its most controversial exceptions, including some that critics say allow colleges to "game" the law.

Under current law, for-profit colleges can get no more than 90 percent of their revenue from federal student-aid programs such as Pell Grants and subsidized student loans. Senator Durbin's bill would lower that threshold to 85 percent, the level it was at before for-profit colleges successfully lobbied to raise it in 1998.

The bill would also require the colleges to count GI Bill benefits, military tuition assistance, and several other sources of federal funds as student aid.

Many for-profit colleges manage to avoid violating the 90/10 rule only because under current law, the billions of dollars the colleges collect from students paying with GI Bill benefits and military tuition assistance are not counted as federal money in the calculation.

At the University of Phoenix, for example, federal grants and loans account for about 88 percent of revenue, according to an analysis published last week by Stifel Nicolaus, an investment bank. If Phoenix's military-related income was also counted as federal funds, that share would increase to 92 percent. Phoenix is the nation's largest private university and the one with the biggest piece of the military-student and veteran market.

American Public University, which doesn't come close to violating the 90/10 rule now because it receives just 36 percent of its revenue from federal student-aid funds—but gets about 50 percent from tuition assistance and GI Bill benefits—would also lose eligibility under the Durbin bill, the analysis shows. (Stifel Nicolaus did the analysis as an informational item a day after stocks of several companies briefly went into a tailspin on reports of a rumor that the Obama administration was trying to tighten the 90/10 rule through an executive order.)

The bill, which will be co-sponsored by Sen. Tom Harkin, an Iowa Democrat who is also a critic of for-profit college abuses, would also make it harder for colleges to use the loans they make themselves to students to evade the cap. And it would apply the disqualification after just one year of noncompliance; now the colleges don't lose eligibility unless they violate the cap for two consecutive years. An Education Department report from last February found that in the most recent reporting period, eight colleges had violated the 90-percent limit and an additional 257 had exceeded the 85-percent mark.

Over the past two years, Senators Durbin, Harkin, and Thomas R. Carper, a Democrat from Delaware, have each highlighted the outsize role of for-profit colleges in educating veterans and active-duty military students and the effects of excluding military benefits as part of the federal calculation. A report in November from a key Senate committee on education chaired by Mr. Harkin found that eight for-profit college companies received about 90 percent of the $1-billion-plus in "Post 9/11 GI Bill" benefits awarded to the 10 biggest recipients in the first two years of the program; of the $4.4-billion awarded over all, 37 percent went to for-profit colleges, although they enrolled only 25 percent of the students. The senators have also questioned the quality of the colleges' programs and the share of revenue the colleges spend on marketing, lobbying, and executive pay.

For-profit college leaders say their institutions deserve credit, not criticism, for their outreach to veterans and service members.

Although Mr. Harkin's support could help the bill's chances, the measure will probably have a tough time passing in the Republican-controlled House of Representatives, where support for the for-profit college industry is stronger.