Targeting For-Profit Schools: The First Federal Crackdown

The 1952 Korean War GI Bill cracked down on for-profit schools. The new law ended the practice of paying GI educational grants directly to colleges, eliminating overnight the incentive to jack up tuition at for-profit schools to collar more federal aid. (Congress did not restore direct tuition payments of GI Bill benefits to colleges for 56 years, but the reintroduction of the direct payment provision promptly triggered a new round of for-profit abuses after the enactment of the 2008 post-9/11 GI Bill).

A host of other provisions in the Korean War GI Bill explicitly targeted for-profit schools. For the first time, for-profit schools had to demonstrate that at least 15 percent of their students paid their own way (the so-called 85-15 rule), creating a market value test that a program could attract students even without federal dollars. Similarly, for-profit schools had to have operated for at least two years before they were eligible for GI bill benefits, ending the proliferation of fly-by-night schools dependent on government aid for their existence.

For-profit abuses of the World War II GI bill had a long afterlife in Congress and in subsequent administrations. The Eisenhower-era National Defense Student Loan Program (NDSL), a progenitor of the Perkins Loan Program, provided loans to campuses to distribute to students with financial need, with an emphasis on improving science, mathematics, engineering, and foreign-language preparation. It was the first federal loan program to provide direct loans capitalized with funds from the U.S. Treasury, with one notable restriction: for-profit schools were ineligible for the loans.

The current era of a massive federal student loan program begins with the landmark Higher Education Act of 1965, which created the Federal Insured Student Loan (FISL) program. Today, the FISL program is sometimes referred to as the Stafford Loan program, which includes both federal Direct Subsidized and Unsubsidized Loans. Two decades after the World War II GI Bill, lawmakers’ antipathy toward for-profit colleges was so entrenched that proprietary schools were not only barred from participating in FISL loans but also were not counted as an “institution of higher education” in section 101 of the Higher Education Act (HEA), which defined institutions of higher education as public or private nonprofit institutions.

Congress enacted a separate piece of legislation, the 1965 National Vocational Student Loan Insurance Act, with a much smaller federal loan program for students at for-profit schools. In 1968, Congress merged the two federal student loan programs, but continued to exclude proprietary schools from being recognized as institutions of higher education in section 101.

A separate section of the 1968 amended law, section 102, allowed a for-profit school to receive federal student aid only if it provided an eligible “program of training to prepare students for gainful employment in a recognized occupation.” That differentiation of for-profit colleges from other postsecondary institutions remains in effect today. Section 102 provided the statutory basis for the Obama administration’s gainful employment rule, which required only career training programs to demonstrate that most graduates earned enough in the jobs they had been trained for to pay off their federal student loans.

By law, in other words, the GE rule could not apply to traditional four-year or two-year degree programs and had to be limited to career preparation programs at for-profit colleges, along with credential/non-degree career prep programs at community colleges and a few private nonprofit schools—a legal requirement that Secretary DeVos understood. When she rescinded the Obama administration’s GE rule in 2019, she wrote that the Department “could not simply expand the GE regulations” to cover all institutions because the term “‛gainful employment’ is found only in section 102 of HEA.” “Without a statutory change,” DeVos wrote, “there was no way to expand the GE regulations to apply to all institutions.”¹

It is true that the 1972 HEA amendments, which created the Pell Grant program, explicitly included for-profit schools for the first time as part of the universe of “postsecondary” educational institutions eligible for the new federal grants and federal student loans. Even so, the newfound congressional support for “institutional equity” marked a dramatic departure from existing law and regulation. Dick Fulton, head of a for-profit accreditor, the Association of Independent Colleges and Schools, observed that if he had predicted when he was hired in 1961 that “in 10 to 12 years, proprietary schools will be built into all federal student aid programs, I would have been a candidate for commitment to a mental institution.”²

And while the new Pell Grant program included for-profit schools on the same basis as other schools, it initially sharply limited the use of Pell Grants at proprietary schools. From 1972 to 1976, Pell Grants could only be used by full-time first-year undergraduates, and for-profit schools, which catered to part-time mid-career students, had few full-time students.

Congress also initially barred “ability to benefit” students from the Pell Grant program—older students without high school diplomas or GEDs who could demonstrate by passing a test that they could benefit from taking college courses. Some for-profit schools had large numbers of ability-to-benefit students, who Congress did not clear for Pell Grants until 1978.