The Idea Lobby

July 30, 2010

Should Uncle Sam Attend For-Profit Schools?

Problems with student loans revolving around for-profit universities draw moves to reform the federal footprint.

By Emily Badger

The late-night infomercial time slot is typically reserved for products people later regret buying — ab rollers, Ginsu knife sets, bad classic-rock compilations. Higher education hardly seems to fit.

The sector of the industry that advertises there, however — for-profit schools like University of Phoenix and DeVry — has been booming. The industry has tripled in size over the last decade. The University of Phoenix, the Chronicle of Higher Education recently noted, has an enrollment now bigger than the entire undergraduate population of the Big Ten.

Critics, including officials in the Obama administration, see in all of this growth an equally explosive problem. For-profit schools saddle students with the highest debt loads in higher education and the longest odds on actually paying any of it back. And the bulk of that money comes from taxpayers in the form of federally subsidized student loans.

The University of Phoenix, for example, reported last year that 86 percent of its revenue came from federal Title IV student aid. It’s an investment from which the government gets little in return when students neither graduate nor repay their debt. And it subsidizes an educational industry beholden not to students, but to Wall Street.

“This is now a sector in which the vast majority of participants are actually engaged in what I view as counterfeiting of degrees and consumer fraud,” said Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers. “Consumer fraud defined as over-advertised, over-promised, overcharged and under-delivered.

“For a group that reports to be market-based,” he went on to a room of education insiders at the New America Foundation, “what is a better measure of market failure than apparently nobody but the idiot federal government puts their money into these institutions? That is the single best indication that the product has no intrinsic value. People who spend their own money don’t spend it there.”

Critics say the system has grown at the expense of taxpayers and low-income students. In an attempt to protect both, the Department of Education last week proposed new rules to reform the industry (it’s accepting public comment for the next month).

The for-profit industry argues that it serves a need traditional schools don’t, providing flexible online classes for students who don’t have time to commute and technical training for adults already in the work force. The Obama administration doesn’t dispute this — that such schools could be a part of ramping up the percentage of educated Americans — and so has tailored the regulation to reform the industry, rather than extinguish it.

The regulation would make individual programs ineligible for student aid if they fail to prepare students for eventual “gainful employment.” Regulators will look at two overlapping measures: graduates’ ability to repay their loans (as a debt-to-income ratio) and the repayment rates of all former students (those who graduate and those who don’t).

The Department of Education projects that under the new rules, 5 percent of programs (not entire institutions) would become ineligible. Another 55 percent would raise flags by having, say, a repayment rate below 45 percent, or a median debt load of more than 8 percent of income.

Nassirian calls the benchmarks “anemic” relative to the scope of the problem. But the administration’s stated goals also raise another question: If it’s a waste of the government’s money to subsidize loans for education that doesn’t actually lead to gainful employment, why stop at for-profit higher ed? Couldn’t the same be said of a liberal arts degree in philosophy?

James Kvaal, a deputy undersecretary at the education department, says the agency has long been responsible for setting minimum standards of eligibility for for-profit schools seeking access to federal student aid. The phrase “gainful employment” has been on the books since 1965; DOE has simply never defined it before.

For-profit schools also stand apart from their counterparts for another reason: They tend to target low-income students squeezed out of the public or private four-year system. In this sense, the problem invites parallels to the subprime mortgage crisis.

A certain public good arises out of increased home ownership, as with increased access to education. Ostensibly in service of that goal, many people who can’t afford to take on debt are invited to anyway.

“When you’re talking about regulating subprime loans, you’re setting minimum standards. You are potentially reducing peoples’ ability to get loans,” Kvaal said. “Here we’re talking about programs’ eligibility. Students aren’t going to lose their eligibility.”

It’s also hard to argue for access to an education that may leave students worse off than when they enrolled.

“If we have an access problem in this country,” Nassirian said, “we should forthrightly address it and not simply satisfy ourselves by stuffing the pockets of low-income citizens with vouchers to enable somebody to rip them off. That is not education.”