Government

Officials of For-Profit Colleges See Department's Proposed Rule Changes as 'Aggressive'

December 01, 2009

Any thoughts that the U.S. Department of Education planned only to tweak existing regulations that affect for-profit colleges and other higher-education sectors were dashed on Monday when the agency released a draft of proposed revisions to a panel of negotiators.

Many people in higher education, especially those in the for-profit sector, were taken aback at the substantial changes proposed, with some calling the move "aggressive" and "surprisingly strong."

The panel, whose members include federal officials and representatives of institutions and associations affected by the regulations, has been charged with re-examining 14 rules in a process known as negotiated rule-making.

Among the department's proposed changes are eliminating the 12 "safe harbors" adopted in 2002 to clarify a ban on incentive compensation for student recruiters. The safe harbors specify types of compensation plans that do not violate the ban.

Other proposed changes deal with assuring the integrity of "ability to benefit" testing procedures, defining a high-school diploma, and determining how institutions ensure gainful employment for their students.

Ripples in the Markets

By far, the most significant change to come from the department is the proposal to eliminate the safe harbors.

Consumer advocates and admissions officers from traditional colleges have urged the department to do away with the safe harbors, arguing that the exemptions, which allow colleges to pay enrollment-based commissions under certain circumstances, encourage recruiters to sign up unqualified students.

Officials of for-profit colleges and lobbyists favor keeping the safe harbors, saying they provide much-needed clarity on whether specific types of payments are in compliance with the law.

Trace A. Urdan, an education-industry analyst with Signal Hill, an investment firm, said the for-profit sector was not expecting such a strong move from the department on incentive compensation.

As a result, he says, stock trades were off on Tuesday for some for-profit education companies. Bridgepoint Education, which runs Ashford University and the University of the Rockies, was affected the most, with a 4.2 percent drop in its share price. Other companies were off between 2 and 4 percent.

Mr. Urdan said there was talk that perhaps the department's strong move was part of a negotiating tactic.

"Most industry folks don't believe that the safe harbors will entirely go away," he said.

Options on Gainful-Employment Rule

Another area of concern was the department's consideration of changes in a rule that requires for-profit institutions to show that a percentage of their graduates find "gainful employment."

Mr. Urdan said he found those potential changes more disturbing, and he characterized it as "overreaching" of the department to get involved in how colleges price various programs.

The department decided not to provide draft regulatory language on gainful employment at this time. However, department officials are considering two options for determining whether institutions are complying with that rule.

One would require a college to show a "reasonable relationship" between the price a student is charged for a specific program and the "value added," which the department suggests could be defined as the difference between the salaries in that field earned by the average graduate of the program and the average high-school graduate. Another option would be to look at whether a student's starting annual income was adequate to cover student-loan obligations for the program "while still having an adequate amount available to meet living expenses."

Mr. Urdan said that the department should not be inserting itself into the business of setting prices. Instead, he said, that is the role of the market.

"I don't know where this will end up," he said. "I continue to feel this is a real overreaching by the department and goes beyond the intent of Congress. Price controls were discussed and rejected."

Validating High-School Diplomas

In another area, the department's suggestion that institutions be required to keep listings of high schools in three categories related to the established validity of their diplomas also did not go over well.

Harris N. Miller, president and chief executive of the Career College Association, which represents about 1,400 institutions, most of them operated for profit, said the onus should be on the federal government, not the institutions. The government, he said, is the one entity that can keep a list of legitimate schools.

The department also proposed new measures regarding the administration of "ability to benefit" tests. Students who do not have a high-school diploma or a GED, and have not completed high school through home schooling, have to pass an ability-to-benefit test to qualify for federal student aid.

The department has proposed requiring publishers of ability-to-benefit tests to establish a process to identify and follow up on test-score irregularities. A test publisher would be required to decertify test administrators if it determined that test had been administered improperly. Last summer the Government Accountability Office said in a report that officials administering such a test at one college had given out answers and changed answers for students.

David S. Baime, vice president for government relations at the American Association of Community Colleges, said the proposed changes on ability-to-benefit testing seem to address the egregious abuses and violations that have occurred in the past.

"We are hopeful that these changes, if implemented, will have teeth," he said.

The negotiating panel met last month for the first of three sessions and will begin its next weeklong session on Monday. A final decision on any revisions in the rules is not expected until next year.