U.S. Department of Education

The federal government pours more than $120 billion each year into institutions of higher education through Pell Grants, student loans, and other federal aid dollars, giving the Department a strong obligation to taxpayers. And with a more direct ability to consider and compare the outcomes of institutions, it should be in many ways the strongest regulator in the triad. Accreditation and state authorization are inherently fractured—with different institutions reporting to different entities, they are often held to differing standards. The Education Department plays a particular role in ensuring baseline consumer protection exists for all students, regardless of where they live or which accrediting agency their college selected.

Yet over the decades since passage of the Higher Education Act, the Education Department has often failed to anticipate and prevent poor outcomes for students and taxpayers and of holding institutions accountable when they fall short.

In fact, there is only one student outcome metric that the federal government applies to all federally funded colleges: the cohort default rate. But the measure has a long history of successes and failures.

Throughout the 1980s, particularly given the rise in for-profit colleges during that time, student loan default rates spiked. Between 1980 and 1989, the cost of loan defaults relative to the total costs of the programs jumped from 10 percent to 36 percent.¹ By 1990, the number jumped to more than 50 percent.² With more than half the cost of the program coming from defaulted loans, Congress (rightly) sprang to attention.

In 1990, it passed a budget reconciliation bill that created the cohort default rate metric to measure the share of borrowers entering repayment in a particular year and defaulting during the measurement period, originally two years. The metric was designed to penalize colleges where a disproportionate share of borrowers default on their loans, given that default can destroy students’ credit ratings, lead to wage garnishment, and prevent taxpayers from recouping their investment. Congress decided to cut colleges off from federal financial aid eligibility if they had three consecutive default rates that exceeded 35 percent for the first two years after passage (or 30 percent in subsequent years).³ The effect was swift and significant: in response to the cohort default rate measure, the Education Department removed more than 600 colleges from the taxpayer-financed federal aid system, and national cohort default rates (CDRs) fell from a high of 22 percent in 1990 to 15 percent in 1992.⁴

The Nunn Commission also dove deeply into the issues of waste, fraud, and abuse in the federal loan program. Exploring the issue of rising defaults, it became clear to education committee members in Congress that for-profit colleges were largely to blame. The Nunn hearing final report noted that “the student default rate for proprietary schools was 39%, as contrasted to a 10% rate for four-year public and private schools.”⁵ And the problem was happening on a very large scale: the 10 for-profit schools with the largest revenue from taxpayer dollars, collectively totaling over $1 billion per year, had an average default rate of 36 percent in 1988.⁶

With rare bipartisan agreement, Congress further tightened the definitions in the 1992 reauthorization of the Higher Education Act, and layered many other restrictions on for-profit colleges into the bill.⁷ With a comprehensive accountability structure against the for-profit colleges in place, cohort default rates continued to fall, slipping below 11 percent in 1994 and falling even more, to 7 percent, in 1998 (see Figure 2). One report estimated that nearly a thousand colleges—perhaps more—had been shut down by the impact of the 1992 reauthorization.⁸

Figure 2: National Student Loan Cohort Default Rates

Source: “FY 2011 2-Year National Student Loan Default Rates,” Federal Student Aid, U.S. Department of Education, 2013, https://ifap.ed.gov/eannouncements/attachments/2013OfficialFY112YRCDRBriefing.pdf; and “FY 2015 National Student Loan Cohort Default Rates,” Federal Student Aid, U.S. Department of Education, 2018, https://ifap.ed.gov/eannouncements/attachments/FY2015OfficialCDRBriefing.pdf.⁹

But the effectiveness of the rule was relatively short-lived, and Congress would be forced to play a game of Whack-a-Mole to shut down other emerging problems. For instance, colleges appeared to begin shuffling students at risk of default into student loan deferments and forbearances, delaying their eventual default until the two-year cohort default rate window had closed and giving the school immunity from consequences. An analysis by the Government Accountability Office found that, between 1993 and 1996, the share of borrowers who received a deferment or forbearance on their student loans more than doubled, from 5.2 to 11.3 percent.¹⁰

"The effectiveness of the cohort default rate rule was relatively short-lived, and Congress would be forced to play a game of Whack-a-Mole to shut down other emerging problems."

However, by that point, the political winds had shifted. As Congress approached the 1998 reauthorization of the Higher Education Act, sharp political divides between a Democratic White House and a Republican House and Senate made serious action unlikely. Instead of solving the problems identified by the GAO and others, Congress further weakened the rules.¹¹ The Education Department’s inspector general later found that while the CDR changes in 1998 “materially reduced schools’ cohort default rates”¹² by redefining the rates, but reported that borrowers were still receiving deferments and forbearances in increasing numbers.

Congress did not revise the cohort default rate definition again for a decade, when the 2008 reauthorization of the Higher Education Act came around. A Democratic House and Senate revised the metric entirely, extending the measurement period from a two-year window to a three-year one, albeit with exemptions for colleges at which relatively few borrowers took out federal student loans at all.¹³

The move did increase cohort default rates from 8.8 percent under the old two-year methodology to 13.4 percent under the three-year.¹⁴ But its utility in identifying poor-performing schools and removing them from the federal aid program has continued to decline. In total, the CDR metric penalized fewer than a dozen schools in the most recent year.¹⁵ And data obtained by the Center for American Progress show that cohort default rates continue to rise for the two years after the three-year CDR window closes, and that hundreds of thousands more were severely delinquent on their loans (even if they managed to avoid default).¹⁶ The use and abuse of deferments and forbearances has apparently continued in significant numbers, absent congressional action to continue improving the measure, aided by a “default management” industry that the GAO found often encouraged borrowers—or even bribed them with gift cards—to use deferments and forbearances.¹⁷ And the expansion of alternative repayment options (namely, income-based repayment plans that allow borrowers to pay as little as $0 per month while their incomes are low) made it easier for borrowers to avoid default despite struggling to repay their loans. Colleges that left the majority of their students struggling to repay, though not defaulting, were able to skirt accountability.

With the Higher Education Act six years overdue for reauthorization, Congress is once again engaging in efforts to renegotiate and reauthorize the law. But while many options have been laid on the table, it is unclear where lawmakers will settle. Senate Democrats have indicated a goal of holding colleges accountable for poor loan repayment outcomes beyond default, though the mechanism for that has not been specified.¹⁸ Senate Republicans have similarly argued that the cohort default rate mechanism is flawed, failing to “hold schools responsible for the large share of borrowers who are not in default, but are still struggling or unable to repay their loans.” House Republican and Democratic bills introduced this year both sought to incorporate a measure of delinquency to the existing default rate, though the Republican version would have permitted colleges to continue receiving federal aid as long as they shut down the programs within the institution that failed the CDR threshold.¹⁹

The Office of Federal Student Aid (FSA), which oversees colleges’ operational and administrative functions, their financial stability, and their compliance with hundreds of pages of federal rules and regulations, has failed to keep up with the scale and scope of problems in higher education around the country. In part, that is because of limited capacity. In addition to ensuring $120 billion each year are disbursed to students (via colleges) on time and accurately and $1.5 trillion in student loans already in repayment are properly managed, FSA’s 1,300 employees are responsible for overseeing over 5,000 colleges and coordinating with more than a dozen institutional accreditors and 70 state agencies that share responsibility for overseeing higher education. That is a tall order for any small federal agency, especially given that FSA operates on an administrative budget of only around $1.7 billion per year—one-tenth of 1 percent of the entire outstanding student loan portfolio—nearly half of which is reserved for servicing student loans rather than overseeing colleges and other activities.²⁰

Moreover, FSA’s processes have proven wholly inadequate to respond to—or better yet, prevent—the abuse of federal dollars and prevalence of poor-performing colleges in the system. While the Higher Education Act grants significant authority to the Education Department to ensure colleges are meeting the rules, and to sanction them or even remove federal aid eligibility when they are not, FSA typically acts out of an overabundance of caution, waiting until problems are far too far along before taking serious action. And lengthy due process requirements for colleges make it difficult for FSA to take action early, subjecting students to harm for a longer period of time. The example of Charlotte School of Law earlier in this report is a prime case study for this problem, as is the collapse of Corinthian Colleges in 2014 after years of alleged and known misconduct. If FSA cannot or does not get better at weeding out problematic institutions before they take root, and at taking swift and decisive action as soon as new problems become clear, the Department will continue to stumble along behind the colleges they are sworn to protect against.

Finally, it cannot be ignored that some of the best efforts FSA has made in recent years have resulted in “one step forward and two steps backward.” While FSA operates as a semi-independent performance-based organization, its relationships with the Department are complex. And given that the rulemaking process is run out of the Department, not FSA, some matters fall outside the control of FSA employees. The Department’s efforts to hold career colleges accountable for statutory requirements that they demonstrate they lead to “gainful employment” stalled, for instance, when a new administration removed federal regulations on the issue and terminated a data-matching agreement with the Social Security Administration that permitted the use of administrative data to calculate post-college earnings for such programs. Earlier in the administration, Education Secretary DeVos even named the head of the Trump administration’s transition team for the Department as acting chief operating officer at FSA, a new level of political oversight for the quasi-independent agency.²¹

The Office of Federal Student Aid has several tools at its disposal: program reviews and audits, to closely inspect what is happening at colleges and universities; financial penalties, like letters of credit and reimbursement structures through heightened cash monitoring in place of the standard model in which the Department fronts financial aid dollars to colleges; and the ability to apply limitations, sanctions, and other conditions to institutions of higher education. But those tools are not always used readily when FSA identifies an issue, meaning that poor-performing and high-risk institutions can skate by on the taxpayers' dime. Given the size of taxpayer investment at stake, lawmakers should seek to increase the federal government’s role on accountability, and to ensure that role is exercised appropriately through structural changes to FSA.

"Poor-performing and high-risk institutions can skate by on the taxpayers’ dime."

• Reform the structure of Federal Student Aid to promote heightened oversight. As one of only three performance-based organizations in the federal government, the Office of Federal Student Aid at the Education Department is designed to be quasi-independent from political interests. But as others have detailed, FSA’s established performance goals are “vague” and “unmeasurable,” and do not make it easy to hold leadership in the organization accountable for whether the agency meets its goals around mitigating risk.²² Oversight of colleges is not among FSA’s stated goals in the law. And FSA is accountable only to the secretary, so the degree to which the agency is subject to oversight can vary considerably. An external review, conducted biennially by the GAO with input from GAO-selected representatives of institutions of higher education, students, consumer protection organizations, and the Office of the Inspector General, and based on updated goals that better reflect FSA’s oversight responsibilities, would allow for independent review of FSA’s effectiveness and put increased pressure on the agency.²³

  At the same time, it cannot be ignored that FSA has been underfunded, given the scope of its task, and that the data systems underpinning FSA operations are antiquated. If policymakers are to increase accountability of the team running the Office of Federal Student Aid, it should first provide the resources necessary to oversee more than 5,000 colleges and billions of dollars in federal money each year.

• Increase risk-based reviews of colleges. The Office of Federal Student Aid has created a “multi-regional” team that evaluates colleges operating nationally, including many of the large chains of for-profit colleges.²⁴ While that group has provided much greater insights into the activities of such colleges, it should be empowered to take more, stronger, and swifter action when it finds concerning indicators, particularly given the huge scale on which small findings may cause big problems at nationally operating for-profit and online schools. For instance, program reviewers should make holistic determinations about a school based on its students’ outcomes (like high dropout rates or exceptionally low post-college employment and earnings), external events (like investigations), findings by the Education Department (like misrepresentations or recruiting practices) and should share these findings readily with the relevant regulators to allow for further investigation. Private colleges operating on a significant scale—by location, by enrollment, and/or by the volume of federal financial aid received—should be particularly subject to increased oversight and/or sanctions where appropriate.

  The Department already produces an annual risk assessment for all colleges participating in the federal financial aid system, with the goal of selecting about 300 schools of the riskiest 500 to 600 to undergo a program review.²⁵ Risk factors include financial information, compliance audit findings, complaints from students, adverse actions from accrediting agencies, and statutorily mandated items like high cohort default rates, significant fluctuations in federal aid volume, and high annual dropout rates.²⁶ Given that such risk factors are already relatively well established, lawmakers (or the Department itself, through a new team of experts within FSA and incorporating feedback from the OIG and others in the agency) should assess which elements signal the most risk, and tie those elements to increased oversight with greater discretion for sanctions. Such an accountability scheme would remove some of the discretion and political pressure that may result in FSA not taking action, or not taking action early enough.

  To facilitate these risk-based reviews, the Department should reduce the burden of the current compliance-focused reviews. FSA’s most common findings in a program review are inaccurate data reporting, failure to improve an already-identified problem, or errors with the calculation of federal aid amounts to be returned to the Education Department after students drop out before the end of the semester.²⁷ As the Center for American Progress has previously recommended, FSA should target its program reviews more narrowly than it typically does now, to focus on the most important and/or urgent issues, trimming the time for reviews and speeding the time to sanctions where appropriate.²⁸ This could be facilitated by improved non-federal audits of institutions to cover basic matters of compliance.

• Improve financial monitoring of private colleges. The Department currently requires all private colleges to submit annual audited financial statements, and produces a composite score for each school. However, the growing number of colleges that are not backed by states and that collapse in financial ruin suggests the formula is inadequate to identify situations where taxpayers may require financial protection, and that annual numbers are inadequate to keep pace when major events happen between audits. In the case of Corinthian Colleges, the Department’s inspector general found that a months-long process of disputing a composite score meant that “about 18 months passed” between when the Department notified Corinthian of its failing score and when the final decision on the appeal was made, and the Department never obtained the required letter of credit for that year.²⁹ The financial responsibility rules need to be updated to better reflect significant risk of closure or other liabilities owed to the federal government, using factors identified in FSA’s risk-based review model and reflecting major college closures that were precipitated by widespread illegal behavior. Oversight of the measure should be conducted by the inspector general at the Department, and run-of-the-mill accounting updates should be made speedily and narrowly to ensure the composite score stays current and relevant.³⁰ Colleges should be required to report in a timely manner when they experience significant financial risks, like lawsuits or settlements; state or accreditor sanctions that indicate a major risk of closure; an influx of claims for forgiveness under borrower defense; financial changes at the college; or other problems with schools that share owners. Schools that report such risks should also be required to submit financial statements (unaudited, but nonetheless timely) at the request of the Department.

  Additionally, FSA requires an institution to submit a letter of credit in the amount of 10 percent of its prior-year federal financial aid volume; while it can require a larger amount, it often does not. Among the institutions with the largest amounts of closed-school discharges paid out to students—62 institutions that closed between 1987 and 2016 and had over $1 million in closed-school discharge liabilities—just six institutions had letters of credit on file, and only one had a letter of credit large enough to cover the entirety of the closed-school discharge liabilities.³¹ Certain types of events—those that represent the greatest risks of federal liabilities, like closed-school or borrower defense student loan discharges—should require a larger letter of credit, and those triggers should be spelled out for colleges. FSA should also maintain significant discretion to increase a letter of credit amount where needed. And lawmakers should collect some funds from all risky private institutions, before the point where FSA requires a letter of credit, to provide the Department with additional “liquid” assets it can access when oversight falls short. The fees could replenish a fund to support the costs of closed-school discharges, borrower defense claims, or other liabilities.

• Prevent colleges from dragging out closure at taxpayers’ expense. During the 1992 reauthorization of the Higher Education Act, Congress added new protections, preventing colleges from continuing to receive federal financial aid after declaring bankruptcy, a response to actions by colleges that left students carrying debt and the Department unable to collect the funds.³² But while the for-profit college industry is arguing to roll back those protections,³³ several large for-profit college chains have found a loophole. The Education Corporation of America (in late 2018) and the Dream Center Education Holdings (in early 2019) both filed for receivership in federal court, evading the bankruptcy protections in the Higher Education Act while their financial circumstances collapsed around them. The Department itself identified these receiverships as potentially problematic.³⁴ Congress needs to close the receivership loophole, before it allows another school to abuse the gap in federal rules.
• Strengthen outcomes-based accountability. In 2010, the Department undertook a bold rulemaking process that implemented a long-standing statutory requirement that for-profit and vocational programs lead to “gainful employment in a recognized occupation.” With the use of administrative data and a strong research basis, regulations took effect in 2015, requiring such programs to meet a certain debt-to-income ratio. Programs that missed the mark and failed to improve would lose access to federal financial aid. And in the first year for which debt-to-earnings rates were calculated, nearly 800 programs were identified as failing. An analysis of institutions’ websites demonstrated how effective the rules were; hundreds of the programs (or their institutions) were shut down, even before the rules’ consequences took effect.³⁵ Unfortunately, before the second year of data were published, the Trump administration took office and in short order, withdrew the regulation and terminated the data-sharing agreement between the Education Department and the Social Security Administration to calculate the debt-to-earnings rates. These regulations should be restored, including codification of the key elements of the rule in the Higher Education Act itself to prevent further regulatory whiplash.

  But lawmakers should not stop with for-profit and non-degree programs. The sole statutory metric for student outcomes-based accountability—a cohort default rate—has seen its effectiveness fall by the wayside as colleges find new ways to game the measure. Congress needs to improve that measure as soon as possible by replacing it with a repayment rate that measures all repayment outcomes, including the type of interest accrual common among borrowers with unaffordable debts that leads to student loan balances increasing, rather than decreasing. It should also institute program-level accountability based on graduates’ debt relative to their incomes, even at nonprofit and public degree-granting institutions. More research is necessary to determine how best to accommodate programs where the return on investment is high, but occurs over a longer period of time; but accountability is necessary to ensure students are not left to bear unaffordable debt. A cohort default rate has done little in recent years to incent improvement or to remove bad actors from the system. Lawmakers owe it to students and taxpayers to overhaul that system. Moreover, Congress should consider opportunities for interim sanctions and incentives for improvement to help move the entire higher education system so it serves students better.³⁶

• Establish—and use—interim sanctions short of total loss of taxpayer financing. A loss of federal financial aid access has been, for many institutions, a death knell. As a result, the Department is often reluctant to entirely cut off access, even for schools that vastly underperform. However, the Department has authority in many cases to apply interim sanctions, as well, such as limitations on enrollment. It should take greater advantage of these options in response to poor performance, and Congress should be even more explicit about the Department’s authority to do so (and the circumstances under which limitations may be appropriate) to encourage further use of these alternatives to loss of federal aid.
• Protect students from abusive recruiting practices. Already, the Education Department prevents for-profit colleges from receiving more than 90 percent of their revenue from federal financial aid under Title IV. However, for-profit colleges are barely skirting the rules today, and a loophole means veterans and service member education benefits are exempt from the 90 percent calculation, resulting in aggressive and abusive recruiting of those students. Congress must raise the bar for institutional reliance on federal aid dollars.³⁷

  Moreover, Congress has also established restrictions on incentive compensation by colleges. But a loophole in those rules, established by Education Department guidance, has meant colleges largely outsource the operations of their online programs to a flourishing for-profit industry.³⁸ And online colleges have engaged in the same sorts of aggressive recruiting practices common in the for-profit industry; a recent study found one college called prospective students 45 times; another sent 14 emails to students who visited its website.³⁹ The so-called “bundled services” loophole (which permits online program management companies to charge for a share of tuition revenue, setting up a problematic incentive to recruit as many students as possible⁴⁰) must be closed, so that colleges are the ones offering their programs and prospective students are protected from aggressive marketing practices.

• Strengthen interactions among the members of the triad. The program integrity triad functions with considerable overlap among its members—most notably, in that the Education Department has responsibility for determining which accreditors are recognized as gatekeepers to federal financial aid and for assessing what it means for an institution to be “authorized.” But a rulemaking effort launched in 2018 by the Trump administration vastly weakened expectations for both state authorization and for accreditors. These regulatory rollbacks received far less attention from the public than other high-profile DeVos regulations;⁴¹ but their implications will be drastic and wide-ranging. Their reversal should be an immediate priority for members of Congress and the next administration.

  The triad can be strengthened to better leverage resources. By sharing information, forwarding complaints to ensure all parties are aware of emerging problems, and coordinating on investigations, it can operate better as a team. This will require both logistical improvements in information-sharing, as well as a culture change, particularly among accreditors, where an overly-cozy relationship between accreditors and colleges has created tension for Department officials investigating the schools.⁴² To begin, the Department should respond to calls from 21 state attorneys general earlier this year to restore data-sharing arrangements for student loan information between the federal government and states.⁴³ And it should seek new ways to communicate with states, cooperate on investigations, share information, and promote a robust policy of oversight by all accreditors engaged in the work.

  With respect to the accreditation process, the Department must increase its scrutiny of accreditors, as well as make that review process more open to the public. The Education Department rarely asks the kind of probing questions that might turn up inadequacies in agencies’ processes, and does not often ask that accreditors meet a floor, instead deferring completely to each agency’s own brand of “quality assurance,” however lax it may be. Agencies are not infrequently cited for failing to submit paperwork, but are almost never asked to raise the bar when their institutions are clearly failing to meet a minimum level of performance. And lawmakers should repeal the ban that prevents the Department from requiring accreditors to set outcomes-based standards for quality improvement.

  The National Advisory Committee on Institutional Quality and Integrity, an independent body with membership appointed by Republican and Democratic members of Congress as well as the Education Secretary, is one of the public’s few windows into how accreditors operate and where they have deficiencies. In 2015, NACIQI launched a groundbreaking pilot project to examine the outcomes of institutions within accreditors’ portfolios; if the secretary were banned from considering accreditors’ use of outcomes, NACIQI could help fill the void.⁴⁴ NACIQI cannot back off now, though. With a third of the committee’s membership about to change, it is a watershed moment for accreditation. The examination of student outcomes should be explicitly codified in NACIQI’s mandate, and NACIQI members should continue to build upon and improve this work year after year.