For-profit colleges fight new federal rule

WASHINGTON — For-profit schools are fighting an Obama administration regulation that could threaten financial aid for hundreds of thousands of their students.

The Department of Education’s plan to tighten control over for-profit, post-secondary institutions is the most recent clash between those who believe many for-profit schools exploit students and leave them heavily in debt, and those who argue the schools are over-regulated and treated unfairly compared with public and private non-profit schools.

The stakes are high, with about 3.8 million students attending 3,452 for-profit institutions in the 2011-12 school year, according to the Association of Private Sector Colleges and Universities.

The new regulation, issued in late October and scheduled to take effect July 1, aims to prevent students from being overwhelmed with debt.

It’s based on language in the Higher Education Act, which says for students to qualify for federal student aid, institutions must prepare them for “gainful employment in a recognized occupation.” Under the new rule, a program would comply with that requirement if the annual loan payment of a typical graduate did not exceed 20% of his or her discretionary income or 8% of total earnings.

A student graduating with a bachelor’s degree in 2012 with the average $29,400 in debt would need to earn at least $36,000 a year, assuming a 5.5% interest rate and a 15-year repayment schedule.

Seven days after the regulation was published, the private college association filed a federal lawsuit to block the rule.

“Career colleges must be a stepping-stone to the middle class,” Education Secretary Arne Duncan said in announcing the rule. “But too many hardworking students find themselves buried in debt with little to show for it.”

Students at for-profit colleges represent about 11% of the higher-education population but account for 44% of federal student loan defaults, according to the Education Department.

The department estimates that 1,400 programs serving 840,000 students — almost all at for-profit institutions — wouldn’t pass the accountability standard.

With no improvements, the programs and students would lose eligibility for federal student aid, which can make up as much as 90% of the revenue at for-profit schools.

Chief of Staff Mark Brenner at the Apollo Education Group, parent company of the for-profit University of Phoenix, said it’s too early to tell how the school’s programs will perform under the test.

“But we’re confident the vast majority of academic programs … will be viewed by Secretary Duncan as preparing students for gainful employment,” he said.

Enrollment at the school, one of the largest for-profits in the country, has dropped dramatically, from 470,800 in 2010 to 233,500 this year. Brenner said his company opposes the rule because it is applied selectively and doesn’t cover most programs at public and non-profit schools.

“We think all institutions of higher education should be held to the same standards,” he said.

The for-profit college suit claims the rule is “unlawful, arbitrary … and will needlessly harm millions of students.” The group believes that if the same rule were applied to non-profit and public institutions, 43% of graduates from public colleges and 56% from private, non-profit colleges would not meet the earnings-to-debt payment test.

The group also cites research by the Nexus Research & Policy Center that estimates the rule would cost states $1.7 billion a year to educate students displaced from for-profit schools.

The Education Department acknowledged in the rule that a “shift in students to public institutions could result in higher state and local government costs.” But department officials suggested the study’s costs were inflated because many students who would switch programs would attend another for-profit school.

In addition to the lawsuit, for-profit schools are pushing for congressional action to block the regulation.

Rep. Matt Salmon, R-Ariz., introduced legislation in June that would delay the gainful-employment rule until the Education Department completed an impact study. Sen. Jeff Flake, R-Ariz., introduced a companion bill in the Senate in September.

Neither bill advanced, but Salmon and Flake plan to reintroduce their bills next year when the new Congress convenes. And with the Republicans taking control of the Senate, this legislative effort will have the support of the incoming chairman of the Senate Health, Education, Labor and Pensions Committee, Sen. Lamar Alexander of Tennessee.

“To take 945 pages of regulations to define ‘gainful employment’ — just two words that have been in the higher-education law for over 40 years — shows exactly what is wrong with Washington and its desire to over-regulate,” Alexander said.