For-Profit Colleges Keep Access to Federal Money

Federal judge axes new Obama administration regulations punishing money-making schools.

New rules that would have limited federal aid to career-training programs at for-profit colleges were set to go into effect on Sunday. A judge killed the regulations at the last minute, declaring on Saturday that the product of a two-year Department of Education rulemaking process was “arbitrary and capricious.” He was right, but the rules are far from the only thing that is arbitrary and/or capricious about federal higher education subsidies.

The new regs were complicated. They were designed to punish schools that left students with lots of debt and little in the way of viable job prospects. But after years of wrangling, Obama's Department of Education wound up offering three different ways for programs to prove their worthiness as recipients of taxpayer dollars: Programs with loan repayment rates below 35 percent would automatically become ineligible for federal student aid. Programs where typical graduates were carrying debt loads of more than 12 percent of income would suffer the same fate, as would programs inducing debt loads totaling 30 percent of discretionary income.

Where did those thresholds come from? As Judge Rudolph Contreras of the U.S. District Court for the District of Columbia noted in his decision, the Department of Education pretty much pulled those figure out of their…pencil cases. The cutoffs, he wrote, “lack a reasoned basis.”

The man has a point. Why should a technical training program where only 36 percent of students manage to make regular loan payments be eligible for federal money when a program—perhaps at the same school or in the same neighborhood—where 34 percent of the students hit the mark be denied funds? Both repayment rates are quite abysmal and the Department of Education failed to offer a compelling reason why it drew the line where it did. The judge wrote:

No expert study or industry standard suggested that the rate selected by the Department would appropriately measure whether a particular program adequately prepared its students.  Instead, the Department simply explained that the chosen rate would identify the worst-performing quarter of programs.  Why the bottom quarter?  Because failing fewer programs would suggest that the test was not “meaningful” while failing more would make for too large a “subset of programs that could potentially lose eligibility.”…

In setting the debt repayment rate, the Department picked a palatable figure.  Because the Department has not provided a reasonable explanation of that figure, the court must conclude that it was chosen arbitrarily.

What’s far more arbitrary, however, is that the measure was only ever intended to apply to career-training programs at for-profit schools. Why should the Department of Education declare that a degree in, say, business from a traditional college is worthy of subsidy no matter what the graduation or repayment rates? Why do degrees in philosophy obtained from a for-profit school merit taxpayer dollars?

It’s true that students at for-profit schools have lower graduation rates and higher debt burdens then their peers at traditional schools. But a bad program is a bad program, no matter what kind of school hosts it.

Federal money must come with federal oversight. For-profit schools are drowning in taxpayer dollars—in 2009, the five largest for-profit schools counted on federal student aid for more than three-quarters of their revenue. But going into debt to get a degree is an increasingly poor proposition—which is being made increasingly attractive every day by an ever-growing pool of federally subsidized grants and loans for students to draw from.

Much of the extensive commentary on the new rules—and much of Saturday’s ruling—hinged on the precise definition of “gainful employment.” That’s the key phrase in the Title IV of the Higher Education Act, which authorizes much of the billions in loans and grants that the federal government spend to encourage college attendance.

Judge Contreras did affirm Department of Education’s right to regulate who receives federal money. But by demanding that the standards have some rational basis, the judge sent the Obama administration back to the drawing board. 

Katherine Mangu-Ward (kmw@reason.com) is managing editor of Reason.

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • ||

    For profit colleges win, we all lose. This was one of those lose lose propositions, and will continue to be until student loans are returned to private sector.

  • ||

    ^^This. While I was grateful for any loan assistance I got while in college, I would have been more grateful getting it from the private sector and not paying "twice" for it: both in the payments on the interest and principal, and through federal taxes.

  • Caleb Turberville||

    The University of Phoenix won't be a legitimate university until they field a national championship football team...

    Sorta like the University of Miami.

  • ||

    At least they have their own stadium!

  • Caleb Turberville||

    I think they'll have to expand the stadium to accomodate their 300,000+ enrollment.

  • wef||

    Why do degrees in philosophy obtained from a for-profit school merit taxpayer dollars?

    The General Welfare Clause insists on it, you philistine, anti-intellectual, denier of all art, beauty, spirituality, and science.

  • Pro Libertate||

    No, it's all Tax and Spending Clause now.

  • JayDub||

    Striking down the "arbitrary" 35% bugs me. It's a judgment call, and in judgement calls we have to make arbitrary lines. Why can a person sue for breach of contract 3 years and 364 days after the breach, but not 4 years and 1 day? Why do I have to renew my driver's license every four years? wouldn't 3 to 5 be ok? Why is a 91% and A, but a 89% a B? Who is John Galt? (Sorry, couldn't resist). I think 35% is a good starting point, but it should apply to any institution receiving Fed Aid, and we should slowly demand more.

  • Stormy Dragon||

    Indeed, the judge is engaging in a semantic slippery slope fallacy: that because the boundary between two categories can't be precisely defined, that the categories must not exist. A common example would be the assertion that because you can't define a number of N hairs such that someone with N or fewer hairs is bald and someone with more than N hairs is not, that there's really no such thing as bald people.

  • mgd||

    The problem with the regs that I saw was not the "arbitrary" 35% repayment rate, but that it only applied to for-profit schools. The for-profits, of course, are hated by the public/private educational establishment--allies of the administration.

  • Bill Dalasio||

    Of course, the for-profit/non-profit distinction is more than a little arbitrary in its own right. As a consumer is there really a meaningful difference between a college operating on behalf of its owners and a college operating on behalf of the professoriate and administration?

  • mgd||

    As a consumer, I would say there is no meaningful difference. As an outsider, there is a perception that the for-profits have more incentive to admit unqualified students, keep students enrolled that ought to be expelled, and otherwise engage in shenanigans intended to boost tuition revenue.

    For-profits should need to offer more relevant programs that lead to decent jobs, better placement rates, and better loan default rates to justify their higher price tags. In reality, too much of that price tag is covered for the students; just as in the health care sector, government distortion of the market destroys the information that price signals should be providing.

  • Concerned Citizen||

    As a consumer, you can choose the college that meets your criteria.

  • mgd||

    True, but I doubt many consumers have "college operates to benefit of owners" or "college operates to benefit of professoriate" as a criterion.

  • Bill Dalasio||

    That perception may exist. But, is it accurate? I mean, it's hardly like grade inflation isn't endemic among not-for-profit institutions. It's hardly rare for students at not-for-profit institutions to be 5th or 6th year undergrads.

    It strikes me that your entire second paragraph defines at least the problem. We're putting some set of criteria on for-profits that we give not-for-profit institutions a pass on under the premise of "education for education's sake". Education for it's own sake is great, as far as it goes. But, it shouldn't be a dodge to allow not-for-profit institutions to suck at the public teat while we demand results from other institutions.

  • mgd||

    I don't know that the perception is accurate. I have worked for a for-profit college, as a financial aid officer, registrar, and faculty member (not simultaneously). I can say that at that one institution, there was a great deal of pressure from the admissions team to admit students that the academic team did not think were college material. Generally, the academic team won out--the financial aid office was very keen to watch for satisfactory academic progress and militated for dismissal at the first sign that was not being met, with support from academics.

    To clarify, I wasn't suggesting that for-profits ought to be held to a higher standard. I was simply pointing out that because tuition is generally higher than at public institutions, to attract students one would expect that they would have some better outcomes. If price signals were not being distorted, they would, or they would be out of business.

  • johnd2||

    How about requiring FULL disclosure for all schools. If only 30% of students wind up making enough money to pay back their loans the informed students would go elsewhere.

  • Epicdelusion||

    excellent point

  • paydayloans@||

    How about let the colleges invest their endowments in student loans? They can evaluate the applicant, evaluate the applicant's employment prospects, and negotiate whatever interest rate and terms are mutually beneficial. If less well-endowed schools want to borrow to fund a pool of scholarships that is their business. Seems to me my student loans were funded by my college, and I felt more responsibility to pay the college than I might have felt to re-pay the government. Politicians' lust for spending intervened to develop another entitled group with no part of the process accountable to anyone.

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