'Softened' Regulations Issued For For-Profit Schools
After months of delay, the Department of Education on Thursday issued new rules that could shut down some for-profit colleges and universities.
The department says the regulations are meant to cut off federal aid to schools whose students cannot earn enough to repay their loans. The administration softened the rules in response to industry pressure.
Before he announced the rules, Education Secretary Arne Duncan paid tribute to the important role played by for-profit schools, such as the University of Phoenix.
He said they improve access to higher education, one of the administration's key goals. But then he said that since the industry leans heavily on government-backed student loans, the government has to police those funds by making sure that graduates are "gainfully employed."
"We feel an obligation to impose some level of accountability," Duncan said. "There are also bad actors who recruit aggressively and exploit students, signing them up for loans they can't pay back, and enrolling them in programs that will not lead to jobs."
So now, if a career education program cannot show that about a third of its students are able to start a career and repay their loans, the government could say, "Sorry, no more federal loans for you."
That could shut down many career programs, which get up to 90 percent of their revenue from federally-backed student loans. The industry has been screaming that this is unfair, so the administration compromised. It postponed the enforcement date so for-profit schools won't really feel the hammer come down until 2015, and they will get three strikes before they are out.
But Harris Miller of the Association of Private Sector Colleges and Universities says the department just doesn't have the authority to tell for-profit schools that they are too expensive.
"That's a form of price fixing," Miller adds. "It allows the Department of Education to tell a school, if you want to continue to receive Title Four funds, you have to lower your prices."
Title Four is a term for government loans.
Members of Congress helped fan this debate. They held hearings charging that the industry was exploiting students who borrow more than twice as much in loans as students at traditional schools.
Other members took the other side saying said the department was picking on schools that take the neediest students. The House actually voted earlier this year to block the rules, but the measure never received final approval.
Now, Rep. Rob Andrews (D-NJ) indicated it might be time to try again.
"I have no opinion on whether the department has the authority; I'll leave that to the lawyers," Andrews said. "But I do think that Congress has the authority to define gainful employment, and we should exercise our legislative prerogative to do that."
If Congress does not step in, the for-profit industry has in the past threatened to go to court. For now, the industry says it wants to study the rules. It wants to see if it agrees with the administration's assessment that about 5 percent of for-profit schools could eventually lose access to federal loans.
Educators and investors may want to keep an eye on the stock market Thursday.
For-profit universities experienced huge increases in stock prices in recent years as students signed up in droves. More recently, however, prices plunged as the government threatened to crack down.
Will investors see these rules as a reason to run away? Or, will they think it's time return for a second bite at these growth stocks?
If you know the answer, you might be able to make a few bucks.