Imagine a business where nearly all of its revenue comes from loans it never has to pay back. The product offered is unregulated and the company suffers no consequences when its product does not perform as promised. As an added bonus the customers, who are generally the most desperate for the product and unable to pay, are stuck with repaying those loans while the company’s CEO earns pay that is almost one-third higher than others in the industry.
This is the business model of the for-profit college.
With offerings of distance (online) learning and flexible hours, for-profit vocational schools and colleges like the University of Phoenix and DeVry University appeal to older working adults forced into a career change. They offer everything from medical assistant training to graduate programs in psychology. These same classes are often offered at community and public colleges for a fraction of the cost, but cuts in state funding have made class sizes and availability limited, forcing many into the doors of the for-profit institutions.
They offer promises of training in fields that will offer better jobs and better pay. The people most likely to gravitate to these institutions are generally lower income and minorities, with few other options to further their education due to financial constraints. The majority use federal loans to pay the tuition.
Once they leave these universities, which the majority do so before even receiving a degree, they are burdened with debt and no job prospects in their new field.
Last month, the U.S. Department of Education began working on rules to determine which for-profit colleges, including vocational schools, would be eligible to receive Title IV funding. Title IV provides federal tuition assistance through things like Pell Grants and student loans. This year the DOE plans to introduce a “gainful employment” program early this year. Under this plan, the ability of for-profits colleges to keep Title IV funding will be directly linked to two specific criteria: the debt payment ratio to income and the percentage of graduates defaulting on loan payments within three years of graduation.
If approved, the new rules would be in effect starting next year.
About 9 percent of college enrollment is at for-profit institutions, about two million students. In one school year, for-profit colleges received $32 billion dollars in federal funds, meaning their students carry more than a quarter of federal loans. Some of the largest in the industry receive 90 percent of their revenue from federal funds. These colleges also have low graduation rates, with only 30 percent actually graduating, compared to 65 percent of students at public and nonprofit universities.
Students attending for-profit universities account for 46 percent of student loan defaults.
This is not the first attempt to rework the rules by the DOE. In 2009, they made a similar effort and were heavily lobbied by the industry. In the end, the rules created favored the largest in the industry, resulting in very little change in the way they did business. In 2011, a federal judge threw out the rules, saying they were designed in an arbitrary way.
Now the industry is restarting their lobbying efforts.
They have once again started a campaign, claiming they are being unfairly targeted, focusing on the fact that they are serving those that would otherwise not have access to a higher education. They also point out that most of the student-debt burden is carried by those who attend public and nonprofit institutions. Of course, these students are usually in graduate programs, such as law school or medical school, and have a much greater chance of actually getting a job. The programs at for-profit schools are generally for professions that have potential salaries that are much, much less.
This time, however, they are facing a different landscape. Under more scrutiny from states, many for-profit colleges have found themselves under investigation, largely for false advertising, unethical recruiting practices and falsifying job placement rates. In California, new regulations have already cut state-funded student aid to for-profit colleges that have high loan default rates and low graduation rates. The state has also made licensing requirements much harder.
The DOE wants to do the same.
While the DOE is not talking publicly about the proposed changes, industry experts estimate that up to 20 percent of for-profit colleges would lose Title IV funding under the proposed rules. To avoid another court challenge, the regulations would have to apply to the entire industry, meaning that some of the largest for-profits, such as Kaplan University and the University of Phoenix, would not be exempt from the regulations.
Enrollment is already down 2 percent in just one year, due in large part to the increased crackdown and a better informed public. They are also getting competition from traditional universities offering more online courses and the advent of massive open online courses (MOOCS), which offer free online courses, complete with participation. These courses are generally without credit, but at least one university, the University of Maryland University College in Baltimore, is allowing students to use some of the courses for credit after an examination.
The industry is nervous. They fear the loss of federal funding could be a death knell.
How disruptive the DOE program will be is questionable. The proposed rules require that the average student debt payments not exceed 12 percent of their annual income, or 30 percent of their discretionary income for several years after leaving school. Also, the number of students defaulting on federal loans within three years of leaving the school cannot be more than 30 percent.
That is the current student loan default rate of one of the larger for-profits, Kaplan University – the highest in the industry.