The Student Loan Debt Bubble and College Education Scam

Why the Delay in For-profit College Crack Down?

During the 2008-2009 school year, for-profit entities received over $4 billion in Pell Grants and $20 billion in federal loans.

February 9, 2011

The Lookout - The Department of Education is facing a political firestorm as it attempts to crack down on for-profit colleges that saddle graduates with billions of dollars in federal loans and little hope of finding a job lucrative enough to ever pay them back.

A bevy of regulations that would prevent for-profit colleges from misrepresenting their graduate employment rates and from paying admissions officers based on how many new students they sign up are set to go into effect this July.

But the toughest of the regulations, called the "gainful employment" rule, has languished as the department sifts through more than 90,000 letters from the public about it. The rule would withdraw federal funds from programs whose students have high debt to income ratios and who default on their loans in large numbers.

A coalition of civil rights groups wrote to Secretary Arne Duncan urging him to make the gainful employment rule even tougher, while the for-profit college industry has spent millions on lobbying lawmakers to oppose the regulation, arguing it will deny minority and low-income students a chance at a higher education. (NAACP President Ben Jealous, however, writes that this claim is "like arguing that because mortgage lenders targeted minorities with their most exploitative products and practices, we should not have stopped them.")

The Department of Education says it's on track to begin enforcing the not-yet-released rule in 2012.

"When we publish the final regulations, it will be clear that we've listened carefully and incorporated meaningful improvements from people on all sides of the issue," Sara Gast, a spokeswoman for the department, wrote in an e-mail.

She added they will publish the final regulation in the next few months, after they've read all 90,000 public comments, and that the rule will go into effect July 2012.

Terry Hartle, a lobbyist for mostly traditional universities, says he thinks the department may significantly change the original rule.

"I think they've read through the 90,000 comments at this point," said Hartle, a senior vice president at the American Council on Education. "There's obviously a great deal of political pressure for the department to rethink where it's going."

Hartle says the department's main problem is it can't calculate the debt to income ratio of a program's graduates in advance without the help of the IRS, which is often reluctant to share income information with other agencies. (The draft version of the rule asks colleges to supply income and job placement data.) It could be risky to put the regulation in place only to discover it's disqualifying more students for federal loans than intended, Hartle says. The New York Times writes that the department has no idea how many colleges would lose federal funds under the proposed rule.

"Put aside for a minute the political pressure, there's the question of whether it's good public policy to put something in place when you don't have the data. Without the income data they can't simulate either the repayment rate or the debt to income ratio. That's a pretty big step to take to threaten to eliminate schools' eligibility when you don't know in advance what the results will look like," Hartle says.

The chief lobbyist for the for-profit college industry Harris Miller tells The Lookout he's not against increased accountability, but thinks the gainful employment rule expects students to be able to pay back loans more quickly than is possible. His group has sued the department and Duncan to block three of the rules that have already been finalized, and he says they are keeping their legal options open if the gainful employment rule also goes through.

The for-profit industry argues its schools are indispensable to President Obama's goal of having the highest proportion of college graduates in the world by 2020.

However, many for-profit programs are available at community colleges for a fraction of the price. But community college students say they are having trouble finding seats in their desired classes due to overcrowding, The Wall Street Journal's Kevin Helliker reports. Due to budget cuts, the nation's biggest community college system in California may have to turn away 350,000 students next year, and one report found only 12 percent of community college students in 2004 had a four-year degree by 2009.

It's undeniable that many for-profit schools are riddled with problems, deceiving students about employment prospects and hiring salespeople to aggressively sell their colleges by tapping into people's "pain" and insecurity about not having a college education.

Several students at Everest College, an arm of Corinthian Colleges, told Frontline they graduated from a $30,000 nursing program without ever having set foot inside a hospital, and were effectively unhireable. (Their "pediatric rounds" was a trip to a daycare.) The University of Phoenix and other for-profits actively recruited people from homeless shelters, signing them up for taxpayer-funded loans they couldn't repay.

Many for-profit schools get as much as 80 percent of their total revenue from federal loans, much of which goes right back into the schools' aggressive advertising campaigns. While only teaching about 12 percent of all college students, for-profit students take up a quarter of all federal grants and represent 43 percent of all defaults, according to federal data.

"Those who would prefer no accountability are spending millions of dollars on lobbying and national ad campaigns to distract from the fundamental issue, which is that students and taxpayers need and deserve better protection from unscrupulous and wasteful higher ed programs, regardless of sector," said Lauren Asher, president of the non-profit Institute for College Access and Success.

Time to Ban For-Profit Trade Schools from Receiving Federal Student Financial Assistance?

$24 Billion in Annual Receipts at Stake

September 1, 2010

Associated Content - Dejà vu hit when I heard that the Senate Health, Education, Labor and Pensions Committee was holding hearings in August on alleged fraud by for-profit post-secondary trade schools. The alleged frauds, uncovered in a Government Accountability Office report, were remarkably similar to the frauds underlying cases I handled on behalf of the U.S. Department of Education in the late 1980s and early 1990s.

Providing recruiter incentives for securing enrollments and coaching "prospectives" to provide false information on Federal student financial assistance program (SFA) applications to obtain maximum funding have long been tools of the trade for the unscrupulous.

In what might be the worst example ever of a trade school fraudulently inflating enrollments, a recruiter once "enrolled" into a beauty school hairdressing program and signed up for SFA funding a prospective student with no hands.

As long as there is profit involved, there's an unfortunate built-in incentive to maximize enrollments, regardless of the interests of the "prospectives" involved and the taxpayers footing the bill.

Some of the schools cited in the GAO report are pledging to change their admissions process to eliminate the link between recruitment and pay. This would seem less a bona fide effort to improve the recruitment process than a survival tactic. Without federal FSA funds, the majority of for-profit trade schools would not exist.

The beauty school that enrolled the student with no hands made belated promises to reform when it was charged with fraud just as the schools stung by GAO are doing now. As did many others whose frauds were only somewhat less atrocious. Schools pledging reform under Congressional scrutiny will maintain the reforms until Congress re-adjusts its thermostat. The reforms will most likely dwindle away when the schools think it's safe to maximize profits by any means again.

Does the GAO report suggest that every for-profit trade school program is fraudulent? No. In fact, the GAO investigators were very careful to point out that some for-profit trade schools it investigated used ethical recruiting practices. But asking about the fraud rate of for-profit trade schools is asking the wrong question. A more salient inquiry is whether it's in the public interest to commit taxpayer dollars to funding enrollment in these systemically overly costly and under-productive programs.

When a for-profit trade school charges more than $14,000 for a massage therapist training program substantially identical to one offered by public colleges for just over $500, it's natural to wonder what benefit there is to a student choosing the for-profit trade school program, particularly when the end result of success in either program is likely a part time job with median wages including gratuities of $16.78 per hour, according to BLS data (5/08).

The federal student financial assistance programs are designed to help students pay for post-secondary education, not to benefit schools, be they for-profit or non-profit. Student choice in educational programs is essential, but it doesn't mean the choices have to be unlimited when the public funds are facilitating the education. American taxpayers should decide whether they want Federal dollars used to allow students to attend a category of post-secondary schools long associated with fraud, high tuition rates, low graduation rates, and low job placement rates.

If students had to pay out of pocket or assume unsubsidized loans to attend for-profit trade school programs, $14,000 massage programs no doubt would cease to exist. Ditto for the for-profit trade schools with laughably low graduation and placement rates. If you knew that 7 out of ten students enrolled in a program to learn a trade did not graduate from the program and 9 out of ten did not obtain jobs in the trade, would you spend your own money to enroll?

But introducing Federal money into the equation means prospective students can be lulled into signing up by the real parties in interest -- the schools that pocket Federal funds regardless of what happens to the students.

The funds are no small potatoes. 2,000 for-profit trade schools collectively received $24 billion in SFA funds in the 2008-2009 school year alone. In a speech to the National Press Club earlier this year, Senator Dick Durbin (D-IL) noted that the largest for-profit trade chain, University of Phoenix, received $4.3 billion, or more than one-sixth of the total. By the University of Phoenix's own admission, 90.1 percent of its first time undergraduates and 63.67 percent of its certificate program enrollees overall fail to graduate.

Interestingly, you don't see high school and college students clamoring for their "right" to spend public money to attend for-profit trade schools. The proponents of these programs' participation in SFA programs are the schools themselves, schools which systemically take in far more public money than their graduation and placement rates could ever justify were the statutory entitlement for the category of institution to participate in FSA programs decided based on virtually any reasonable criteria rather than on politics.