Bold New Higher Ed Spending Rules Will Take Federal Money Away from 1 Percent of For-Profit Career Programs Four Years from Now

A while back, someone at the Department of Education noticed that an awful lot of federal money was flowing into for-profit higher education companies. They also noticed that quite a few graduates of the career programs run by those schools were having trouble paying back their loans. On these two points, for-profit colleges aren't terribly different from traditional nonprofit schools. As Cato's Neal McCluskey notes:

Yes, for-profit schools have low program completion rates, but the overall six-year completion rate for four-year programs is just around 57 percent. And yes, for-profit schools leave many students with big debt, but the average debt for all four-year undergraduate students who have taken loans is around $24,000.

But these facts did not stop the Department of Education from writing some very special rules—aimed at for-profits career schools alone—cutting federal aid to programs that exceed certain loan burdens. Those rules, known as "gainful employment" rules, were released today. Here's the official language:

A program would be considered to lead to gainful employment if it meets at least one of the following three metrics: at least 35 percent of former students are repaying their loans; the estimated annual loan payment of a typical graduate does not exceed 30 percent of his or her discretionary income; or the estimated annual loan payment of a typical graduate does not exceed 12 percent of his or her total earnings.

Needless to say, for-profit education companies are not thrilled at the prospect of having to disclose graduate employment, income, and debt stats—nor with the prospect of losing their share of the more than $20 billion in federal higher ed funds that keep them in business.

But the newly issued rules are less severe than the draft version released in July (I wrote all about it here). The biggest change is that the rules don't kick in until 2015, giving schools lots of time to make sure the federal money keeps flowing in appropriately-sized gobs. 

Not-as-bad-as-predicted news is the same thing as good news when it comes to stock prices. For-profit education companies are up today. But a variety of groups aren't pleased, including the National Black Chamber of Commerce and the Hispanic Leadership Fund, since for-profit school cater to a higher percentage of minority students than traditional schools.

Mostly, though, not much will change. In fact, the Department of Education has estimated that only about 1 percent of career education programs will lose their eligibility when the new rules finally go into full effect years from now. And the entire higher education sector, for-profit and nonprofit, will continue to be distorted by massive amounts of federal money.