Betsy DeVos’s For-Profit Strategy Is Risky — for Betsy DeVos

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It probably surprises no one that Secretary of Education Betsy DeVos is not making sense, but her stands on key issues are starting to be noticed in the courts. And while DeVos would not usually be held personally liable for the harm she is doing to students, borrowers, or taxpayers, there is at least one exception: if she knowingly and improperly allocates taxpayer dollars. For that, she could be fined or possibly even imprisoned. And she is partway down that road as a result of her exuberant desire to funnel federal grants and loans to for-profit colleges regardless of their quality or behavior.

Secretary DeVos is in the process of obliterating every program or regulation that she interprets as getting in the way of for-profit companies operating colleges with up to 100 percent federal funds. Exhibit No. 1 was her gutting of an investigation team to root out fraud and abuse. That team was not limited to for-profit colleges. But that’s where the fraud and abuse tend to be, so it’s gone.

Next was her scuttling of a revised process for handling requests from borrowers for canceling their student loans in cases where evidence indicates they were misled by their colleges. A student loan acts as a kind of imprimatur of the value of a college, in addition to fueling its operations. In the wake of abuses by for-profit colleges, Congress in 1994 made clear that the federal government, like other lenders, is implicated in the business and therefore a student who is scammed by a college and financed by the federal loan should not be left holding the bag.

For nearly 20 years that borrower-defense provision was barely used, perhaps because the scandals had subsided as a result of the closure of hundreds of colleges and other reforms that, for a time, kept the worst abuses at bay. In the 2000s, as consumer protections were weakened and many for-profit colleges were supercharged by private-equity investors, predatory behavior by colleges escalated, reaching a crescendo in the recession. Defrauded borrowers then needed relief and, as they became organized, they learned about the borrower-defense provision and started seeking the discharges.

The right thing to do in this situation was to compensate the borrowers, seek compensation from the colleges where possible, and adopt reforms to prevent further abuses. There are budget costs, but recognizing the real costs, and including them in future budget estimates, would create the right incentives to prevent future abuses. That is the approach that the Obama administration took with borrower-defense regulations and procedures that were adopted in 2016 after many months of consultation.

Any student-loan borrower at any type of college can seek a loan discharge based on unfair or misleading acts or omissions by the college. The program is not limited to for-profit colleges; however, the available data indicate that more than 98 percent of the applications involve for-profit institutions. That’s not due to any bizarre proclivity on the part of students who attend for-profits. Instead, for-profit colleges are where the fraud and abuse tends to happen because of their financial incentives and accountability to investors.

Meaghan Bauer and Stephano Del Rose both took out federal student loans to attend the New England Institute of Art, one of a chain of colleges owned by the Education Management Corporation. Bauer and Del Rose realized later that to persuade them to enroll, the college had made false claims about the quality of instruction and equipment, its industry connections, the job prospects for graduates, job placement assistance, and the relationship between tuition costs and probable postcollege earnings. Alleging those abuses, Bauer and Del Rose wanted to follow the 2016 guidance, but were thwarted by DeVos’s setting aside the rule. Represented by the Project on Predatory Student Lending and Public Citizen, they went to court to challenge the department’s action.

DeVos lost. Last month in a blistering 57-page decision, the Federal District Court ruled that the department’s scuttling of the borrower-defense rule was so far from legal and appropriate that it represented “the hallmark of arbitrary and capricious decision-making.” The lawyers are now back in court to discuss what happens next.

Meanwhile, Secretary DeVos has been just as bullish in her determination to kill what is known as the gainful-employment rule. However, if she doesn’t apply some type of gainful-employment requirement to for-profit programs, she could risk going to jail for violating the federal Antideficiency Act, which prohibits federal employees from spending funds in ways not authorized by Congress. DeVos cannot follow through on her desire to treat for-profit colleges “the same” as public and nonprofit colleges, because Congress, in its laws, has decided, correctly, that they are not the same.

For the past 53 years, because of a history of abuses, Congress has restricted funding from the Higher Education Act to institutions that are either public or are nonprofit entities that prohibit “private inurement,” meaning that they have no shareholders or executives who can siphon off money for themselves. To the extent that for-profit colleges are allowed to get federal aid under the higher-education law, it is on an exception basis: only when they can demonstrate that the program in which the eligible student is enrolled is worthy of federal funding because it prepares the student for “gainful employment in a recognized occupation.”

On August 14, Secretary DeVos declared her intention to repeal the gainful-employment definition that had been adopted in 2014. In the Federal Register notice, she admitted that her reason for the repeal is that it is unfair that the regulations target proprietary schools, as noted by some commenters. Of course, it is not unfair at all: Public and nonprofit colleges must abide by financial and accountability controls that don’t apply to for-profits.

But even if DeVos could make a valid case about the unfairness of requiring programs at for-profit colleges to pass some type of gainful-employment test, she cannot change the underlying law passed by Congress, which says that federal money cannot flow to a for-profit college unless the program leads to gainful employment. If she repeals the current rule while continuing to cling to her reasoning, and then opens the spigot of federal money to for-profits without some type of gainful-employment criterion, she will be spending federal funds in a way not authorized by Congress. The consequences could be dire not just for taxpayers and students, but for Secretary DeVos as well.

Robert Shireman is a senior fellow at the Century Foundation and a former U.S. deputy under secretary of education.