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 ([e-mail]) is managing editor of Reason.