For-Profits and Fin Aid: Accountability in Harkin’s Higher Ed Act Draft

Both chambers of Congress and political parties released some details for the reauthorization of the Higher Education Act (HEA) this week. But only Sen. Tom Harkin (D-Iowa), the chairman of the Senate Health, Education, Labor, and Pensions (HELP) Committee put forth a full-fledged discussion draft. This post takes a closer look at the accountability parts of the Harkin bill. For more HEA reauthorization proposals see this first impressions post, this one on workforce implications, or this one on areas of agreement across parties and chambers.

The Higher Education Affordability Act, Harkin’s proposal for reauthorizing the HEA, is the logical outgrowth of several legislative and regulatory efforts conducted over the last several years—particularly Harkin’s investigations into for-profit colleges and loan oversight changes that are only possible with the move to 100 percent Direct Lending. This gives the bill a strong emphasis on accountability, especially in the form of consumer protections for students at proprietary institutions and private student loan borrowers.

While other provisions would provide greater accountability for public and private nonprofit institutions, these are all in the context of federal student aid. This limited approach appears to be partly because of the transitory position of many key higher education performance metrics, as the bill pushes the creation of several new and/or improved data points but places no accountability elements on them. That makes them serve more of a stage-setting role for future accountability efforts than a current attempt at oversight.

Two places in particular get a noticeably lighter touch: accreditation and programs such as GEAR UP and TRIO, which are administered by the Office of Postsecondary Education.

Consumer protection at for-profits

For several years Harkin carried out exhaustive work investigating the for-profit education sector and the bill reflects a lot of the lessons learned from those endeavors. On the metrics side, it tweaks the amount of revenue a for-profit college can receive from the Department of Education from 90 percent to 85 percent and strengthens that cap further by adding all other federal revenue into the calculation. This is much stronger since it means that federal monies, such as veterans benefits, will now be counted under the revenue cap rather than helping colleges meet the non-federal revenue requirement.

The bill also establishes a cross-government oversight commission on for-profit colleges and “warning lists” that would require colleges to inform parents and students if they had been caught in any illegal activity, had a monetary settlement, had programs suspended or closed, or been found by the commission to be engaging in deceptive practices. Later sections also establish mandatory standards that trigger program reviews, which include a few provisions specifically for proprietary institutions, such as acquiring or converting to a nonprofit institution.

What’s especially interesting about these latter provisions is they are geared more around triggering automatic enforcement activity by the Department of Education and other government agencies rather than installing a host of new accountability metrics. The recent events with Corinthian Colleges shows the Department is willing to make use of some of this existing oversight authority, so the question is whether a more clearly defined process would increase the use of these powers.

Taking ownership of the federal loan portfolio

When the HEA was last reauthorized in 2008 the bank-based Federal Family Education Loan (FFEL) Program was about to start falling apart. Two years later it was erased by legislation. Not only did this move save taxpayers billions of dollars, it allowed higher education policy to move onto other policy issues, such as cost and completion. The centralizing of the loan programs also made it possible to exert greater control over federal loan oversight and servicing.

But while the transition to awarding loan dollars directly has been incredibly smooth, back-end servicing still needs work. Part of this is because the current big four federal loan servicers were chosen in an emergency when the Department needed someone to handle the FFEL loans it received during the recession. Those contracts just got extended, but there’s also a Congressional mandate to redo performance measures for servicers. The creation of the Consumer Financial Protection Bureau (CFPB) and increasing interest in student loans from the Treasury Department has also changed the dynamics around federal loan policy.

The Harkin bill contains a number of provisions that would significantly increase oversight of the servicers and debt collection agencies in the federal aid programs. It would require the Department to terminate contracts of any entity it finds violating requirements laid out by the CFPB or the Fair Debt Collection Practices Act. This could be worrisome to some servicers that have already been caught violating other servicing laws. The Secretary would also have to certify that private entities are required to collect federal loan debts and their compensation is reasonable. Debt collectors and servicers are also banned from marketing other financial products to borrowers unless they are out of school and opt into the system.

A number of provisions also require the Department to be more active in responding to issues raised by borrowers. This includes creating a central system for managing complaints both for servicers and institutions and greater activity by the Federal Student Aid Ombudsman. Finally, the bill also commissions a study of whether the Department should consider having specialized servicers—such as one that only handles delinquent loans.

The bill goes beyond a general accountability framework and even gets involved in the specifics of servicing practices. A lot of this is through amendments to the Truth in Lending Act. This includes things like spelling out how servicers of federal and private loans have to apply payments, establishing mandatory transition periods where borrowers have some protections if loans get transferred, stating when servicers are required to provide certain pieces of information to students, prohibiting the charging of fees when borrowers make certain requests, and responding to such requests within a set time period. The bill would also limit collection charges to no more than the actual costs of collection or a set percentage of the loan balance.

The Truth in Lending changes are particularly noteworthy because they give clearer ground rules for servicers that can then be enforced by the CFPB. That agency has already announced it will oversee large non-bank student loan servicers and these changes would give it more provisions to enforce in judging servicer quality.

Some of the federal servicing changes are also designed to help borrowers get access to income-based repayment (IBR). For example, the Department would have the ability to obtain adjusted gross income and household size information through an agreement with the Secretary of the Treasury on borrowers who become 150 or more days delinquent so it can generate a likely payment under IBR. Servicers would then have to inform borrowers that they could make that payment to get on IBR, making the process feel less burdensome to students. But this would not undo the requirement to eventually file the IBR paperwork on an annual basis.

Restrictions on private loans

While the Truth in Lending changes apply to servicers of all types of student loans, many of these provisions specifically address problems with private student loans uncovered by the CFPB. But the Harkin bill goes even further on regulating these products. For existing loan holders, the biggest benefit would be restoring the ability to discharge a private loan in bankruptcy, something that has been nearly impossible since a mid-2000s change. The bill also addresses new private student loans by requiring institutions to certify them before a lender can disburse funds to a student and prohibit lenders from disbursing private loans that are greater than what students actually need to cover the gap between financial aid and the cost of attendance. Stronger certification is an idea that was watered down to a largely useless self-certification form in the last HEA reauthorization.  Finally, the bill would add private student loan information into the Department’s National Student Loan Data System, making it easier to get a centralized picture of what’s going on in this market.

 What about non-proprietary institutions?

Though for-profit colleges get a special focus on the accountability provisions, other elements of the bill would affect all colleges. Almost all of these provisions are related to federal student aid or financial transactions. For example, colleges with high default rates, low graduation rates, or other similar issues would be automatically subject to program reviews. Institutions would also be required to create a code of conduct for affiliated consumer products and not be able to engage in revenue sharing arrangements. These provisions would largely tackle some of the concerns raised about relationships between colleges and debit card providers that can result in high fees to students for receiving federal student aid refunds. Similarly, they would be banned from using revenues from federal sources to engage in marketing or recruiting.

The greatest potential accountability measure for all colleges is not a specific plan in the bill but rather a call for a commission to create a plan for institutions to share in some of the risk of the federal student loan portfolio. While commissions are typically a way to avoid an issue, this is an area with fewer developed proposals, so building thinking in this area could present substantial long-term challenges for colleges.

While changes to student loan cohort default rates was a major sticking point in the last HEA reauthorization, the Harkin bill does not touch that metric. Instead, it tries to shift the focus to repayment rates, albeit ones without any consequences. The bill contains two different ways of calculating repayment rates. The first, which is modeled off of the one used in the first gainful employment rule, measures the percentage of student loan dollars on which borrowers made enough payments to reduce the outstanding principal balance by at least $1 from one year to the next.

The more interesting addition, though, is a “speed-based” repayment rate. This tries to measure how quickly an institution’s cohort of loans are being repaid by looking at how much the outstanding balance is reduced compared to the original amount and factoring how many years the debts have been in repayment. What’s interesting about this metric is it makes it possible to generate estimates of how much longer it might take a cohort of borrowers to repay their loans, which could be a consumer-friendly metric. It also presents a tougher standard for thinking about loan results, since it expects borrowers to not just avoid growing their balances, but actually pay them down in an orderly manner.

The bill is quieter on issues of academic or completion accountability. Instead, it appears to be more focused on taking first steps that could potentially lead to future efforts. For example, the bill would require the publication of all accreditation self-studies and evaluation reports, which could assist in future efforts to improve these agencies, but would not result in significant immediate changes. Similarly, the bill would expand the data elements on the College Scorecard to include things like more complete graduation rates and success with Pell students, though there are no connections to those data and any consequences. One potential challenge to these additional data elements is that the bill does not contain a student unit record, meaning colleges would have to do all the work constructing these new cohorts themselves.

A role for states

One of the major challenges with accountability for around higher education costs is that there’s no formal relationship between states and the federal government. That’s problematic since state financing decisions can have significant effects on tuition levels.

The bill tries to address the federal-to-state issue through two paths. The first is a matching block grant program largely similar to an idea put forward by the American Association of State Colleges and Universities, which would reward states for spending more money per student. While that play is largely focused on just finances, there’s a separate competitive grant program that would reward states for addressing policy changes like making remediation more standardized, easing transfer, creating more dual enrollment programs, and a number of other changes. This proposal seems similar to the idea of a Race to the Top: College Affordability and Completion called for by the Obama Administration in the past. Perhaps the most surprising (in a good way) requirement would be for states to develop a system for assessing student learning and publicly report outcomes.

What’s missing?

If the accountability provisions of the Harkin bill had a slogan it would be “fixing finances first.” The strong emphasis on protections around lending, servicing, and debt collecting would end some of the more problematic practices in this area. Automatic program review triggers, marketing bans, and conflict of interest provisions should increase the scrutiny on colleges’ financial activities.

The types of changes above are financial triage—targeting the most egregious activities and would undoubtedly help protect students. But this means that simple mediocrity absent financial problems largely gets a pass. Yes, schools with low graduation rates would be subject to a program review, but this would likely only result in problems if the poor completion figures are due to financial reasons.

Accreditors also largely do not have much to worry about. Transparency is a very important first step for judging what’s going on, but disclosed documents could show a great degree of ineffectiveness with no consequences. In both instances, a reasonable case could be made for the need to walk before running and lay more groundwork, but it does suggest significant accountability for educational results is quite far off.

The Title III and V programs that directly fund minority-serving institutions would also see changes that are more on the lighter side. The bill would streamline the number of allowable activities, a useful requirement to focus the dollars more. It would also give the Secretary to withhold the last two years of funding for grant recipients under the Strengthening Institutions program if they are not on track to fully implement proposed activities after three years.There is not much additional accountability for making sure these dollars are well used.

But at least both broader institutions and accreditors get some changes that perhaps lay the foundation for future work. The same can’t be said of the more than $1 billion spent every year on the GEAR UP and TRIO programs. Despite constituting a major investment (and the largest non-student aid college access play in the federal government) the bill doesn’t contain a single change to these programs.

The lack of TRIO changes are particularly disappointing because it would not undo questionable provisions added in the 2008 reauthorization. For example, that reauthorization banned the use of random assignment to study the effectiveness of TRIO programs. It also added a competition-quashing requirement that existing TRIO programs be able to earn up to 15 points beyond what a new entrant could receive (e.g., the maximum score for an existing applicant is 115 versus 100 for a new one). The lack of changes to these investments in an otherwise fairly ambitious bill does not bode well for reforming these programs.

What did I miss?

Of course with any bill as long as the 780+ page Harkin bill there’s going to be missed sections and provisions. If you see other accountability elements worth discussing, leave them in the comments.