The ideological war on for-profit higher education continues, but it’s no longer the one-sided fight it used to be. Last week the Department of Education announced the elimination of a major Obama-era regulation on for-profit colleges. Predictably the move was portrayed in much of the news media as if it were a win for frauds and predators, but the truth was very nearly the opposite.
A little background. The traditional tool to monitor predatory practices in the higher education sector is called the cohort default rate (CDR). The CDR tells regulators how often a school’s students default on their loans within a two-year period; a higher default rate suggests that a school may be admitting students on borrowed money knowing those students can’t pay back the loans. A school whose CDR rose above a certain level could lose its access to Title IV funding—in essence a death blow.
The Obama administration correctly concluded that the CDR was too lenient, but top officials at the Education Department took the opportunity to create a rule that would punish for-profit colleges—and probably regulate them out of business altogether.
What they came up with was termed the “gainful employment” rule. The name was taken from a single phrase in the Higher Education Act of 1965 stipulating that public funds should go to students training “for gainful employment in a recognized occupation.” From that phrase Department officials created a massive and convoluted regulation purporting to determine if students from for-profit institutions were earning enough after graduation to pay back their loans. If too many students didn’t meet the required income level, the Department could shut the program down. Several for-profit institutions and their allies mounted a legal challenge, but eventually a version of the gainful employment rule went into effect.
There were two problems with the rule. First, it was so complicated that it lent itself to abuse by regulators. Only a few federal number-crunchers understood how all the data came together to track graduates’ income levels, with the result that Department regulators could shut programs down for almost any reason they chose. Some for-profit institutions with cohort default rates as low as 10 or 12 percent—in line with some traditional institutions—were having their programs shut down.
The second problem was that the rule unfairly assumed that students graduating from for-profit schools could reach their income potential just after graduation. Many students in their first two years out of Harvard and Princeton don’t make much progress on their student loans, either.
Education Secretary Betsy DeVos’s decision to rescind the gainful employment rule is the right one. In its place the Department plans to place new transparency requirements on both traditional and for-profit institutions. An even more forward-thinking solution is to require all schools to keep financial reserves against defaults on student loans. That would create an incentive for school to stay away from the riskiest loans while also keeping the taxpayer off the hook for bad loan policies.
It’s undeniable that some organizations admit low-income students simply to get their borrowed money and don’t train them to do anything useful. Those organizations should be shut down, but not at the cost of punishing financially sound institutions that offer disadvantaged students a chance to get what “nonprofit” schools can’t or won’t offer them.
