The Long View

WASHINGTON -- Critics of for-profit colleges were disappointed by the final “gainful employment” regulations. They said the Obama administration caved to industry pressure and put out a watered-down, inadequate set of rules.

The U.S. Department of Education calls that narrative “misleading.” The department said the regulations are strong, legally sound and will protect students from underperforming academic programs.

An estimated 1,400 programs would fail under the gainful employment regime, 99 percent of them at for-profits. In comparison, a previous iteration of the regulations, which a federal judge largely halted in 2012, would have snared just 193 programs.

“Objectively speaking, it’s a tougher rule,” a department official said Thursday.

Graduates from an additional 900 programs the new rules capture have an average annual wage of $17,000 and owe $1,700 per year on their loans, according to the department. One in four are in default.

“It’s pretty clear those are poor outcomes,” the official said.

For their part, for-profits said the rules are part of the administration’s wide-ranging, unfair attack on the sector and the lower-income students it serves.

It’s probably too early to say who’s right. Experts on all sides were reading through the 945-page document on Thursday. (The Federal Register version, released Friday, is 215-pages long, albeit in a smaller font.) Its impacts remain uncertain, said Terry Hartle, senior vice president for government relations and public affairs at the American Council on Education.

“This is an exceptionally complicated regulation,” he said, and also one of the most high-profile in the department’s history.

The fight over gainful employment isn’t over. For-profits are likely to challenge it in court, as they did successfully with the administration’s first attempt.

The U.S. Congress also might seek to block the rules in a spending bill. That scenario could happen in a matter of months if Republicans -- who tend to have a more favorable view of for-profits and to resist regulation -- take over both chambers next week.

“I believe that the future of the gainful employment regulation will be decided by one of the other two other branches of government,” said Hartle.

Industry Shakedown

While the rules face an uncertain future, it’s undeniable that the Obama administration’s aggressive pursuit of for-profits has helped to both weaken and change the industry.

The bruising, five-year debate over gainful employment has been accompanied by a broad crackdown on for-profits by federal agencies ranging from the Securities and Exchange Commission (SEC) to the Department of Justice and the Consumer Financial Protection Bureau. Senate Democrats, particularly Sen. Tom Harkin of Iowa, also have played a leading role. And state attorneys general have gotten into the act, with dozens of lawsuits filed against for-profits.

At the same time, economic factors have made it harder for the industry to attract the droves of students it did before the recession. Bad publicity, which the White House has helped stir up, has contributed to steep enrollment declines at the institutions.

The environment has proven to be too much for some of the industry’s biggest players. This week Grand Canyon University, which is one of the only thriving publicly traded for-profits, announced that it plans to go nonprofit. Company executives said they want to get away from the “stigma” that clings to for-profits.

Likewise, the Education Management Corporation last week ditched the stock market. The huge for-profit chain cited costly compliance with SEC regulations as a reason to go private. EDMC can also avoid quarterly disclosures to investors about its legal liabilities, which include numerous federal and state lawsuits.

The collapse of Corinthian Colleges earlier this year, however, represents the industry’s biggest shakedown -- and one in which the Obama administration played a prominent role. The Education Department’s 21-day freeze on Corinthian’s financial aid payments was the final straw for the struggling company.

In a phone call with reporters this week, White House and department officials discussed the new gainful employment rules. They took credit for successfully pushing for-profits to deliver a more-affordable, higher-quality education to students.

One official said the regulations are part of the president’s “college cost agenda.”  He said the rules would raise the bar on for-profits, which have until next July to get into compliance. Arne Duncan, the education secretary, agreed.

“We fully expect many to improve,” he said.

'Criticism from All Sides'

Consumer and student groups were upset that the Education Department dropped a student loan default rate standard from the final rules, leaving only metrics on graduates’ debt-to-earnings ratios as factors on which the colleges can be judged and punished.

As a result, gainful employment will fail to take into account the relatively large number of for-profit students who rack up debt but drop out and never earn a credential. It also would fail fewer programs than the draft version, which was released in March and would have failed 1,900 programs.

“Since a majority of for-profit college students are unable to complete their degree, the decision to eliminate consideration of default rates has seriously weakened the rule,” said Maura Dundon, senior policy counsel at the Center for Responsible Lending, in a written statement.

Yet despite their concerns, Dundon and most other for-profit critics said the rules are a positive step toward protecting students, and holding for-profits to a higher standard than before.

Department officials said Thursday that the remaining debt-to-earnings metric is the best available “outcomes-based accountability measure.” They said the final rules would apply to 5,500 academic programs that enroll 2.5 million students. Programs that would fail currently enroll 840,000 students.

Despite the strong assertions to the contrary by consumer advocates, who are usually the administration's allies, for-profit lobbying was not the reason the department dropped default rates as a metric, said the officials, who declined to be identified.

“We actually got criticism from all sides” on the metric, one said.

Student and consumer groups claimed that for-profits might game default rates. And the department said for-profits did not complain that strongly about the default rate standard, which they said was telling. “They know it’s manipulable,” said an official.

Community college advocates also had pushed back on the default rate metric. They argued it might penalize programs where only a small number of students borrow, given the sector’s relatively affordable tuition.

The department had other policy and legal concerns about using a programmatic default rate. For example, the feds’ have institutional default rates standards in place. But those are not designed to measure gainful employment. And the default rates would not capture students who are struggling to repay their loans.

So while department officials thought a default rate standard had potential, they became convinced during the public comment period on the draft rules that it would not be effective. And the strongest criticism came from consumer groups, department officials said.

“It would completely undermine our efforts” if the standard was ineffective, a department official said. “We’ve got to get it right this time.”

Likewise, the department considered the addition of loan-repayment or completion rates. But they couldn’t figure out how to make them work, either.

“We believe further study is necessary before we adopt programmatic cohort default rates or another accountability metric that would take into account the outcomes of students who do not complete a program,” according to language in the final rules.

The department stressed that it will require gainful employment programs to collect and report default rates. That data will be available to students and regulators under the rules, as will information on former students’ wages, graduation rates and debt loads.

Those reporting requirements, however, drew criticism from the American Association of Community Colleges. The association said the heavy load of required recordkeeping under the rules will force cash-strapped colleges to “fritter away” millions of dollars.

Kevin Kinser said the debate over gainful employment was reminiscent of the administration’s negotiations over health care. Kinser, who is chair of the educational administration and policy studies department at the State University of New York at Albany and an expert on for-profits, said the department worked hard to satisfy critics who were never going to support the rules.

“The regulations are certainly weaker than many wanted,” he said via email. "But, if they can run the legal and political gauntlet and get these rules implemented next summer, to paraphrase Joe Biden, it will be a big ‘effing deal."