Should the government restrict student aid to career and trade schools?

To follow is an excerpt from the CQ Researcher issue "Career Colleges" by Barbara Mantel on January 7, 2011

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Any day now the Department of Education could release the much-anticipated final version of a regulation that would restrict federal student aid at career colleges and trade schools. “While career colleges play a vital role in training our work force to be globally competitive, some of them are saddling students with debt they cannot afford in exchange for degrees and certificates they cannot use,” Education Secretary Duncan said when the department first proposed the gainful-employment rule last July. [Footnote 27]

The department was scheduled to publish the final rule last October, but furious lobbying by the for-profit sector caused it to reconsider. “Through this proposed regulation, the department will be making law that shuts out the very students who have the most to gain through their access to the programs offered by career colleges,” said Washington lawyer Lanny Davis, spokesman for the Coalition for Educational Success, a group representing career colleges. [Footnote 28]

To qualify for federal student aid, the Higher Education Act for decades has required that career colleges and vocational-training programs prepare students for gainful employment in recognized occupations. But gainful employment has never been defined. Now the department is attempting to do just that and has ignited a contentious debate.

The proposed rule is complicated. A program would be fully eligible for federal student aid if at least 45 percent of its former students — whether graduates or dropouts — are repaying the principal on their federal student loans. Even if a program's repayment rate is lower than that, it could still be eligible if its graduates have a debt-to-earnings ratio of less than 20 percent of discretionary income or 8 percent of total income. (Discretionary income is defined as income above 150 percent of the poverty level.)

A program would be ineligible for student financial aid if its repayment rate is less than 35 percent and its graduates have a debt-to-earnings ratio above 30 percent of discretionary income and 12 percent of total income.

Programs between these two poles would be on a restricted list. They could still enroll students with federal financial aid but would not be able to expand, and they would have to warn students about the high debt burdens they are likely to carry in relation to the salaries they are likely to earn. [Footnote 29]

The industry says the consequences for the students it serves would be enormous. An industry-commissioned analysis estimates that between 1 and 2 million fewer students would enter postsecondary schooling over the next 10 years as a result of the rule.Footnote 30

The Department of Education disagrees. It estimates that the vast majority of students at for-profit schools that could be deemed ineligible would be able to transfer to another program or school. Future students would attend the remaining eligible schools. [Footnote 31]
Federal Loan Default Rates by Type of School

Jonathan Guryan, a professor of human development and social policy at Northwestern University in Chicago, says the department is much too optimistic. Guryan researched and wrote the industry study and says only a quarter of affected students have reasonable alternatives. “That's partially because many community colleges are at capacity and partially because there are not other for-profits nearby with similar programs,” he says.

But Pauline Abernathy, vice president of the nonprofit Institute for College Access and Success in Oakland, Calif., says the remaining for-profit schools will fill the void. “The industry has demonstrated it can and will rapidly expand capacity,” says Abernathy. “Keep in mind also that at least seven of the 14 publicly traded colleges have more than 50 percent of their students in exclusively online curriculums, so proximity and physical space are not necessarily even issues.”

Guryan, however, says such expansion may not make sense. “It's hard to imagine that for-profit schools would create new programs to serve those students,” he says. “Presumably they would be worried that their programs would fail, too.” After all, a closed program would be ineligible “at least in part because of the characteristics and choices of the students it served,” according to Guryan. [Footnote 32]

But critics of the industry say poor results for schools that serve at-risk students are not inevitable and that schools could raise repayment rates and lower debt levels for their students more than the industry assumes is possible.

For instance, a recent study analyzed the experience of a small group of historically black colleges and universities in Texas, which 11 years ago faced critically high student-loan default rates. Over three years, the schools managed to more than halve default rates by improving student retention and graduation, offering better loan counseling, partnering with outside financial-aid experts and improving financial-aid packaging. [Footnote 33]

The for-profit higher education sector's objections to the proposed gainful employment rule go beyond the rule's projected unintended consequences. The industry also says the caps on debt-to-earnings ratios are arbitrary; the process for devising the rule was biased; and the statutory authority of the Department of Education to make such a sweeping change is nonexistent.

“They simply were unwilling to let this proposal go through the sunshine of a legislative debate,” says Miller of the Association of Private Sector Colleges and Universities. When asked if a lawsuit is possible, Miller says, “All options are on the table.”

While the industry is hoping the department withdraws the gainful employment rule or makes significant changes, groups like Abernathy's are hoping the department makes it stronger. For example, programs that are restricted can remain so indefinitely, and simply not allowing them to grow is not much punishment, says Abernathy.

“Some of these schools went through such rapid growth earlier that limiting the number of students to the level of the year before would still be an enormous number of students.”

A few for-profit companies have already taken action to improve student outcomes. Kaplan is allowing students to enroll in classes for several weeks to test out a program and withdraw during that time without any tuition obligation. And the University of Phoenix is requiring students who enter with fewer than 24 credits to take a free, three-week, non-credit orientation.

The Issues:
* Is deception pervasive at career colleges?
* Do career colleges provide a quality education?
* Should the government restrict student aid to career and trade schools?

For more information on the CQ Researcher report on "Career Colleges" [subscription required] or purchase the PDF.

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Footnotes

[27] “Department of Education Established New Student Aid Rules to Protect Borrowers and Taxpayers,” Department of Education, Oct. 28, 2010, www.ed.gov/news/press-releases/department-education-establishes-new-student-aid-rules-protect-borrowers-and-tax.


[28] Lanny Davis, “Time for a Re-Do on ‘Gainful Employment,’” The Huffington Post, Nov. 18, 2010, www.huffingtonpost.com/lanny-davis/time-for-a-redo-on-gainfu_b_785121.html.

[29] “Frequently Asked Questions, Program Integrity: Gainful Employment Notice of Proposed Rulemaking,” Department of Education, www2.ed.gov/policy/highered/reg/hearulemaking/2009/ge-faq.pdf.

[30] Charles River Associates, letter to Tony Miller, Deputy Education Secretary, Nov. 22, 2010, p. 1.

[31] “Frequently Asked Questions,” op. cit.

[32] Jonathan Guryan and Mathew Thompson, “The Availability of Alternative Programs for Students Displaced by Gainful Employment: Testing Assumptions Crucial to Estimates of the Impact of Gainful Employment on Students,” Charles River Associates, Nov. 22, 2010, p. 3.

[33] Erin Dillion and Robin V. Smiles, “Lowering Student Loan Default Rates: What One Consortium of Historically Black institutions Did to Succeed,” Feb. 2010, Education Sector, p. 5, www.educationsector.org/sites/default/files/publications/Default_Rates_HBCU.pdf.