For-profit colleges will have to limit how much debt students amass in career-training programs or have their federal funding cut, according to rules issued Thursday by the Obama administration.
The rules are the culmination of years of contentious debates over the responsibility for-profit colleges have to ensure that graduates of career programs receive “gainful employment.” While the restrictions could place 1,400 programs in jeopardy of losing federal student aid, critics say the rules still leave room for schools to abuse the system.
Administration officials championed the rules in 2009 as a way to protect students from programs that could leave them drowning in debt. For-profit colleges, which get most of their revenues from federal student aid, argued that they were being unfairly targeted and the regulations would hurt low-income students.
The new rules, which take effect in July 2015, require programs to show their graduates having loan burdens that don’t exceed certain levels of their pay. It will cover thousands of programs at for-profit colleges and non-degree programs at public and private nonprofit colleges.
But critics say the regulations are too lax because they only examine the debt burdens of those who graduate from the programs — not those who drop out.
“The regulation is ripe for manipulation,” said Barmak Nassirian, director of federal relations and policy analysis for the American Association of State Colleges and Universities. “The majority of students at for-profits don’t graduate. This regulation takes no recognition of their plight, so why even do it?”
Under the new rules, the loan payments of a typical graduate at a program cannot exceed 20 percent of discretionary income or 8 percent of total earnings. Programs with graduates whose loan payments equal 20 to 30 percent of discretionary income, or 8 to 12 percent of total annual income, would be placed in a warning zone.
A program would be labeled failing if typical graduates have loan payments that surpass 30 percent of discretionary earnings or 12 percent of annual earnings.
Programs that fail in two out of any three consecutive years — or land in the danger zone for four consecutive years — will be ineligible for aid.
Based on the department’s estimates, about 1,400 programs would not pass the accountability standards, up from the 193 projected in 2012. Education Secretary Arne Duncan told reporters that none of the programs will be immediately disqualified.
“Career colleges must be a stepping stone to the middle class. But too many hard-working students find themselves buried in debt with little to show for it. That is simply unacceptable,” Duncan said. “These regulations are a necessary step to ensure that colleges accepting federal funds protect students, cut costs and improve outcomes.”
The fight over these rules has dragged on for much of Obama’s two terms.
When the rules were first introduced, for-profit schools lobbied to block the regulations, with the support of many congressional Republicans and some Democrats. The courts, too, have gotten involved.
In 2012, a federal judge blocked a key provision in the administration’s proposed rules, sending the department back to the drawing board. In March, the administration proposed a new metric looking at the rate of default among both graduates and dropouts at any given time.
Thursday’s rules, however, eliminated that measure.
Department officials said they would look at default rates over an extended period of time if it appeared a school was trying to manipulate data to sidestep the rules.
But experts say that solution still fails to address the absence of data on students who drop out. And those students run a higher risk of defaulting on their loans, said Terry Hartle, senior vice president of the American Council on Education.
He suspects the administration jettisoned its measure from March to make the rule “legally bulletproof” in light of the court’s objection. “The rule is more streamlined, less strict, and the controversy surrounding it will continue,” he said.
Industry groups lambasted the rule. Steve Gunderson, chief executive of the Association of Private Sector Colleges and Universities, said the regulation is “nothing more than a bad-faith attempt to cut off access to education for millions of students who have been historically underserved by higher education.”
He accused the department of favoring “public institutions that benefit from generous taxpayer operational subsidies, but have lower graduation rates and higher default rates, over programs at private sector institutions where graduates are achieving real earning gains and successfully repaying their loans.”
The administration said attending a two-year for-profit institution costs a student on average four times as much as attending a community college. More than 80 percent of students at for-profits borrow, while less than half of students at public institutions do the same. Students at for-profit colleges represent only about 11 percent of the total higher-education population but 44 percent of all federal student loan defaults.
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