Obama’s Bid to Change the Incentives that Drive For-Profit Higher Ed

Now that the U.S. Department of Education’s notice of proposed rules on “gainful employment” is out, one thing should be perfectly clear: the Obama administration has come not to bury the for-profit college sector but to try and help save it from itself.

Yes, the proposal would cut off federal financial aid to for-profit college programs whose students take on the most unmanageable levels of debt (in relation to their expected future earnings) and have the poorest record of repayment. The administration, however, went out of its way to make sure that only the most irredeemable programs — those, as described by Inside Higher Ed, “where fewer than 35 percent of former students are repaying their loans, and where graduates have a debt-to-income ratio greater than 12 percent of their total income and 30 percent of discretionary income” — would be put in jeopardy.  What’s more, the proposal caps at 5 percent the number of programs that could become ineligible in the first year, and delays implementation until the 2012-13 academic year, which should at least theoretically give for-profit colleges an opportunity to bring their programs into compliance.

But as the administration explains in a document that accompanied the notice of proposed rule making [starting on p. 98], its real goal is to change the incentive structure driving the industry so that schools are motivated to “design and offer programs that will serve students well: preparing them for high-paying jobs without burdening them with excessive debts that cost them and taxpayers.” In short, administration officials say they are trying to push schools “to provide larger returns on their students’ investment.”

This is clever wording because for a long time now, the biggest players in the industry — the publicly traded for-profit higher education companies — have been largely taking their cues from Wall Street, which judges the performance of these companies almost entirely by their quarterly earnings. As a result, to keep their stock prices up and their investors happy, these companies must show that they are continually growing, even if that’s not in the best long-term interest of their students and their schools. Any retrenchment from this single-minded goal sets off alarm and panic.

This means that these schools are regularly in a frenzy to meet the aggressive enrollment targets set by their bosses back at the companies’ headquarters. As many current and former for-profit college recruiters have attested, they are under a tremendous amount of pressure to get students in the door and signed up for classes and financial aid, even if they know full well that many of these individuals have little chance of succeeding and don’t fully understand their student loan repayment obligations.

A former recruiter at Ashford University, which is part of the publicly traded Bridgepoint Education chain, explained “this recruit at any cost” mentality in a public comment he submitted to the Education Department last year after the agency announced its intention to rewrite its program integrity rules:

We are given a matrix that shows the number of students we are expected to enroll. We also have to meet our quotas and these are high quotas. Because we are under so much pressure, we are forced to do anything necessary to get people to fill out an application – our jobs depend on it. It’s a boiler room – selling education to people who don’t really want it…The level of deception is disgusting – and wrong. When someone who can barely afford to live and feed kids as it is, and doesn’t even have the time or education to be able to enroll, they drop out. Then what? Add $20,000 of debt to their problems – what are they gonna do now? They are officially screwed.

The Obama administration is seeking to counteract the pressure that Wall Street puts on these schools in several ways. In June, it proposed to eliminate “safe harbors” in the Education Department’s regulations that have allowed for-profit colleges to get around a federal law that bars schools from compensating recruiters based on their success in enrolling students. Now, under the “gainful employment” proposal, it seeks to limit the growth of programs that appear to be doing their students more harm than good — by threatening to cap their enrollment or even removing their eligibility for federal student aid.

In addition, the proposed rule would, for the first time, require schools to apply to the Education Department before they could offer new programs that qualify for federal student aid. Schools would have to provide enrollment projections to the Department and demonstrate, with documentation from employers, that these programs serve a needed purpose and that jobs will be available for graduates. In making its determination, the Department would also have the authority to put limits on the program’s initial enrollment.

Will the administration be successful in achieving its ambitious and extremely worthy goal? At this point, it’s hard to say, as for-profit college leaders and lobbyists, financial analysts, and consumer advocates are still trying to figure out how big an impact these proposed rules would have. It’s certainly possible that the administration has set the bar too low (by allowing schools with repayment rates as low as 45 percent to escape penalties) to have the effect it desires.

But one thing is certain — these proposals are testament to the fact that the administration is not interested in killing the industry, as some have charged. On the contrary, they are designed to strengthen the sector so that these schools are truly able to deliver on the promises they make.

[Editor’s Note: On Friday, the New America Foundation is hosting an event on “Reining In For-Profit Higher Education,” in which we will be bringing together key Obama Administration official James Kvaal and two outside policy experts to take a closer look at the “Gainful Employment” proposal. If you have not yet registered for the event, you can do so here.]