We have been asked a number of times in the last few months what the Education Department‘s proposed new rules really mean for the for-profit college industry. With all the bad press in recent months I thought I’d explain the two rules that can potentially have the biggest impact.
The main issue is that the government wants to cut back on federal funding given to schools that are most at risk of having their students default on their loans. The government’s argument is that for-profit schools are not being 100% honest and transparent about the debt amounts students are getting themselves into. Colleges also over-promise the ability for students to gain employment after graduation according to the Education Department.
This leads us into the most important proposed rule:
- “Gainful Employment” - This rule would require colleges to measure the ratio of salary to loan among their graduates and if it passes above a certain threshold the school will lose a percentage of aid they are eligible for.
The “gainful employment” proposed rule breaks schools into three categories where they classify fully eligible, restricted and ineligible colleges. In order to remain fully eligible to receive full federal funding a school must stay below 8% in graduate salary to loan ratio AND over 45% of graduates must be making payments toward the principal of their loan.
Certainly some schools are within this range but I could not find data on which are and which are not. (Find full list of for-profit schools here.)
The second important proposed rule addresses student recruiting tactics.
- Student recruiting tactics – This rule would prohibit colleges from compensating recruiters on a commission basis for how many students they bring in.
This is actually not a new law; it has been around since 1992 but due to various loop holes and lack of clarity it has not been enforced. The current law from 1992 does not specify what percentage of a recruiter’s compensation can and cannot be commission based and therefore has never really been enforced. This proposed rule would strictly outline what can and cannot be done when compensating recruiters.
Current Default Rates
Current statistics show that student loan default rates are at 11 percent at for-profit colleges compared to 7 percent for the higher education industry as a whole. Proponents for the for-profit industry however, state that students who enroll in online colleges tend to be lower income and self supporting students, therefore are generally at “higher risk” to default.
What Does All This Really Mean?
Fortunately the Education Department is taking their time in reviewing and trying to gain consensus on the proposed rules. A final set of rules is expected to be voted on in November but this has been a hotly debated issue all year and will only heat up.
When you look at the proposed rules in early 2010 compared to today they have become slightly more realistic, although my guess is they will need more adjustment in order to pass in November. There are not enough statistics right now to justify some of the propositions so they will have to become more lax or will have a difficult time passing.
A Different Point of View
Sitting back and analyzing the for-profit college situation I see a third view that could be a viable solution in an ideal world.
The real issue at hand is the need to better educate people in the United States, not necessarily depriving students of federal funding they need for an education. According to the New York Times, we currently rank 12th out of 36 developed nations in education. If instead of focusing on taking away federal funding, we focus on improving the quality of education at for-profit colleges, it would be a win win win for everyone (students, colleges, government).
The for-profit industry is great at innovating and providing easy access to millions of students who otherwise would not get an education. If that strength is channeled toward creating innovative ways to create educational programs that put students in positions to get high paying jobs and better learn their craft, there would be no need to argue over student loan defaults.
The goal for everyone is to improve education and it seems like that has gotten lost in the shuffle with the new proposed rules.
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hi,
i want to have good education.
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