Department of Education Tightens the Screws on For-Profits – But Will it Help or Hurt?
Posted By Terri Williams on May 27, 2015 at 9:45 am
On July 1, 2015, the Department of Education plans to enforce stricter rules on for-profit schools in an attempt to lower massive student loan debt and higher-than-average default rates at these institutions. For-profit schools represent only 13 percent of total college enrollment; however, 47 percent of students who default on loans attended for-profit schools. The schools obtain most of their revenue from federal student aid.
According to a 2012 Senate investigation cited in the New York Times, for-profit schools receive almost $43 billion a year – 80% from taxpayers. However, the majority of students often leave school without a degree, and many drop out in as few as four months after starting a program.
Associate degree and certificate programs cost four times as much at for-profit colleges than at community colleges and public universities. 96 percent of students at for-profit colleges take out student loans, compared to 13 percent of students at community colleges, and 48 percent of students who attend four-year public colleges.
According to a Senate report, 30 for-profit schools that were investigated spent money disproportionately. The CEOs at these institutions were paid an average of $7.3 million per year. In addition, an average 22.4 percent of revenue was spent on marketing and recruiting, while 19.4 percent went to profits and only 17.7 percent was spent on instruction.
Are tighter regulations the answer?
Based on this information, the new DOE regulations, which state that for-profits must ensure that their graduates earn enough money to pay back student loans without exceeding 8 percent of their total earnings, may seem like an obvious choice. However, it’s not as cut and dry as it may appear at first glance.
According to Dani Babb, an online instructor and founder and CEO of The Babb Group, the for-profit sector often serves underrepresented populations, including at-risk and highly diverse students. “These are students who may not get into college any other way. By nature, they are high-risk. Regulations may have the opposite effect of removing options for students who already have very few available to them to go back to school,” she says.
Babb says there has to be a better way to assess whether a university is doing a disservice to students or helping them. “As those of us who teach research classes know,” she points out, “often just pure numbers without meaning or context do not tell the entire story.”
Ramin Sedehi, Managing Director of the Higher Education Practice at the Berkeley Research Group is also unsure whether government regulations will be effective. “This is a very complex question, and one that can be viewed quite differently depending on one’s political viewpoints,” he says. “I suspect that as with all things, the truth or the right thing to do is somewhere in the middle.”
For example, he says, there are excellent arguments in favor of changing some of the financial responsibility measures the Department of Education uses to evaluate the health of institutions for continuation of financial aid eligibility.
Some of the standards are outdated and not applied in a timely manner. “However,” he notes, “it puts the schools that are indeed in financial trouble on notice and forces actions to change the institution’s trajectory. Does it generate false results? Yes, of course.”
Something needs to be done
Sedehi says the balance-sheet measures used by the Department of Education may be erroneous, but that’s not the real issue. “The fact that many of these institutions are earning less than they are spending each year and taking out debt they can ill afford does not require an accounting degree to understand,” he says. He refers to Moody’s, Forbes, and other entities that have all pointed out that many higher education institutions and especially smaller or more niche-oriented institutions are in trouble: “The indicators are all quite present, so it is not the regulation that is burdensome, but rather, the reality of the marketplace that is unequivocal in its interpretation.”
As a former university official, Sedehi says he is in favor of reducing regulations, simplifying rules, creating clear and acceptable practices, and limiting overreach by regulating agencies. However, he concludes, “Whether it is possible to thoughtfully and practically fix regulations without throwing out the necessary regulating markers that generate the appropriate positive actions is an act we have not yet mastered.”