Proposed Regulations on For-Profit Institutions

I'd like to fill in the gaps in the debate over proposed regulation of for-profit, private institutions. Last fall the Department of Education proposed establishing regulations that could limit the options available for students to attend for-profit institutions at a time when we have stagnating economic growth and a huge unemployment rate? Do we really want to add to the unemployment rate by shutting down one route to a job for these students and potentially laying off employees at these institutions? How does this square with President Obama’s goal of America being number one in degree completion by 2020? We are currently ranked 12th in the world.

The timing of the proposed regulations couldn’t be worse and more destructive to the needs and goals of these students. There may be problems at some for-profits with respect to promising more than they can deliver in terms of a job after graduation and their potential income, but the lumping of thousands of such schools into the same basket with the possible effect of shutting down some of the schools is akin to throwing out the baby with the bath water. It is unfair to the vast majority of for-profits that try hard to provide the kind of educational experience that will enable their graduates to obtain a good job and one that will ultimately provide the level of income needed to repay federally-funded tuition loans. Moreover, many of these institutions provide a more broad-based educational experience than just vocational training so that they contribute to society by creating a more informed citizenry.

On August 4, 2010, a report by the Government Accountability Office (GAO) found evidence of deceptive recruitment tactics by 15 of America’s leading for-profit colleges, including one operated by Kaplan Inc. Some of the colleges, which also included the giant University of Phoenix, insisted that the incidents—which ranged from misleading potential students about tuition costs and likely post-graduation salaries to encouraging them to file fraudulent loan applications—were isolated. The findings have moved some powerful Democrats in Congress including majority whip Dick Durbin (Illinois) and Tom Harkin (Iowa), who chairs the Senate Education Committee, to urge the White House to adopt new “gainful employment” rules.

Under the proposed “gainful employment” regulation, for-profits could lose access to federal financing aid – the majority of their revenue – if 35% or more of their former students aren’t repaying the principal on their loans. Colleges face other restrictions if the typical student is spending more than 12% of income on loan debt. Last year repayment rates were 36% at for-profits, compared with 56% at nonprofits and 54% at public institutions. These statistics are misleading because students at nonprofits such as public colleges and universities pay much less to attend because these institutions are state-funded. Therefore, the amount of tuition that comes out of the pocket of students attending such institutions is disproportionately less than those at for-profits. Moreover, the for-profits provide access to low income and minority students who may be working and raising children so that they benefit from the more student-friendly timing of course offerings that are designed to fit into their personal schedules. I can tell you first hand having taught at public universities for thirty years that class offerings are often scheduled to meet the needs of faculty more than to satisfy student needs.

The “gainful employment” regulation proposed by the Department of Education would require for-profit schools to show that their graduates’ annual loan payments are less than 8 percent of their starting salaries. The additional regulatory burden that would be imposed on these schools co-opts a free market solution to the problem of student default on loans. The for-profits should provide the necessary data to inform potential students of their success rate in helping graduates find jobs. Full disclosure is the key. Then, let the students decide whether they want to attend. The regulatory mechanisms are in place to verify success data. These schools are already state regulated and many have achieved regional accreditation by private oversight bodies that monitor their programs. Do we really need to impose another layer of regulation and add to the bureaucracy? Besides, fraudulent claims already can be investigated and litigation filed against offending schools. 

The fact is the for-profits can't guarantee a job or an amount of income. For-profit schools provide students with the tools necessary to get jobs but there are other factors in securing and keeping a job such as communication and interpersonal skills. You can't regulate these important job-success factors.