Things look a bit bleak for the for-profit education industry: it seems like every other day a new federal or state agency is launching an investigation or proposing new regulations. The latest news is that a coalition of 32 state attorneys general, along with the Consumer Financial Protection Bureau, is expanding a probe into lending practices at for-profit colleges. This news follows pronouncements by the Securities and Exchange Commission, the Justice Department, the Federal Trade Commission and the Federal Communications Commission of stepped-up initiatives to combat alleged predatory practices by for-profit colleges. In the midst of this full frontal assault, the industry is facing a major new regulatory scheme under the Department of Education’s impending Gainful Employment rule. What the new regulatory scheme will cover and require remains to be determined, but the released drafts of the rule portend extensive record keeping and reporting requirements. With mounting investigations and regulatory scrutiny, no wonder shares in for-profit education have been on the decline: how can these companies turn a profit in the midst of all this costly government intervention?
But the CFPB and the 32-state coalition could (unwittingly) be the industry’s knights in shining armor. The enforcement agencies’ expanded probe – along with action by the SEC, DOJ, FTC and the FCC – could provide a good argument for why the Education Department’s impending Gainful Employment rule may be redundant. Since there is so much disagreement over the Gainful Employment rule, not only over the prospective text,but also over the rule’s utility in the first place,it may be time to follow the cues of some in Congress who advocate abandoning the rule when the Higher Education Act is next up for re-authorization (this year).And if Congress could be persuaded to nix the rule, educators could allocate more resources to growth that would otherwise need to be focused on compliance with complex new regulations.
This argument initially may sound like a stretch, but consider some of the following points: (1) congressional infighting about the possible effects of the rule, (2) rule making failures as interested parties cannot come together on regulatory language, and (3) current law and enforcement actions that already address the goals of the prospective rule. There are only so many ways to skin a cat, and you can only have so many cat-skinners (poor analogical cat!).
(1) Congressional Democrats are split on whether the Gainful Employment rule would protect students or negatively impact students. Thirty Democratic members of Congress recently wrote a letter to Education Secretary Arne Duncan voicing concerns over the adverse effects a Gainful Employment rule could have on students. At the same time, 31 Democratic members wrote a letter in support of the prospective rule. During the back and forth on the Democratic side, many Republicans are advocating abandoning the rule, concerned that it would ultimately hurt students.With so much uncertainty, why press forward with a rule that has been lingering in limbo for years?
(2) While Congress members deliberate the rule’s ultimate utility, the Education Department and its panel of negotiators have slogged through several sessions of a statutorily mandated negotiated rule making. They have been unable to reach any consensus on what types of metrics to incorporate into the rule, let alone what metric ranges to use. After several months, three rounds of negotiations, and three very different drafts of the prospective rule, the Education Department is no closer to final language. The third and final round of negotiations, which occurred mid-December, highlighted the extent to which opposing sides remained polarized.
(3) The Education Department has stated that its goals for the Gainful Employment rule are to:
- Define what it means for a program to prepare a student for gainful employment in a recognized occupation and construct an accountability system that distinguishes between programs that prepare students and those that do not;
- Develop measures to evaluate whether programs meet the requirement and provide the opportunity to improve program performance;
- Protect students and taxpayers by identifying GE programs with poor student outcomes and end taxpayer support of programs that do not prepare students as required; and
- Support students in deciding where to pursue education and training by increasing transparency about the costs and outcomes of GE programs.
These goals are already being addressed in current regulations and current enforcement actions. For instance, in November the FTC released marketing guidelines directed toward for-profit colleges, advising colleges against misrepresenting, for instance, their job placement and graduation rates, graduate salaries, credit transferring, etc. The announcement was accompanied by guidelines for prospective students on choosing a school. The FTC’s guidelines send a message to the for-profit education industry: ensure integrity in your marketing and advertising or face the consequences of regulatory action. A new FCC rule, which took effect last October, restricts how for-profit educators can make recruiting calls to past, current, and prospective students.The SEC and CFPB are investigating student recruitment and private lending at various for-profit colleges for possible violations of, for instance, the Dodd-Frank Act (which prohibits violations of federal consumer financial laws and unfair, deceptive or abusive acts or practices), TILA and Regulation Z. And numerous states attorneys general have been actively investigating the industry under state laws.
The expanded probe that the CFPB and state attorneys general coalition is but a continuation of the panoply of government actions and initiatives directed at the for-profit education sector. But the probe provides an excellent basis for reconsidering the necessity of the Gainful Employment rule. The for-profit industry is not shy of regulatory oversight. All the new regulation would achieve is more cost to industry and taxpayers in compliance and compliance reviews.
For-profit education institutions may have breathed a sigh of relief on June 30, 2012, when a federal judge struck down most of the Department of Education’s Gainful Employment rule. The decision came none too soon, as the U.S. District Court for the District of Columbia issued the ruling literally on the eve of the day the regulations were slated to take effect. But these colleges and universities should not rest on their laurels. While the court sided with the private sector in this instance, the judge’s opinion keeps the door open for more and similar regulation.
To address concern over the seeming disconnect between debt burden and employment prospects of graduates of for-profit colleges and universities, the DOE last year published its Gainful Employment rule. The rule was instituted to test schools’ compliance with the Higher Education Act’s requirement that certain institutions must “prepare students for gainful employment in a recognized occupation” in order to qualify for federal funds. To accomplish this, the rule set forth three tests, one or more of which a school would need to meet, to qualify for federal funds. The tests required that:
1. At least 35 percent of graduates must be repaying their loans,
2. The median graduate’s estimated annual loan payments must not exceed 12 percent of earnings, or
3. The median graduate’s estimated annual loan payments must not exceed 30 percent of discretionary income.
The rule further required that subject schools make certain disclosures to prospective students and obtain DOE approval for new programs.
The Gainful Employment rule stirred up consternation in the for-profit world, as concerns mounted over the costs of compliance. The Association of Private Sector Colleges and Universities, the main association representing the for-profit education industry (with over 1800 members), challenged the rule in court.
The APSCU argued that the Gainful Employment rule exceeded statutory authority by stretching the meaning of the term “gainful employment.” The court squarely sided with the DOE on its authority, noting that “gainful employment” is not an unambiguous term and that the DOE has the authority to assess whether educational programs prepare students for gainful employment. The only question, according to the court, was whether the DOE had reasonably promulgated rules to test programs’ ability to prepare students.
Working through an analysis of the rules, the court ultimately determined that the debt repayment standard (No. 1 above) “was not based upon any facts at all. No expert study or industry standard suggested that the rate selected by the Department would appropriately measure whether a particular program adequately prepared its students, the court wrote. The reason: The rule was solely based upon statistics that at the 35 percent rate, roughly 25 percent of schools subject to the rule would fail, i.e. the rate was set because it would knock out the bottom quarter of schools.
The judge rightly ruled that this basis — merely picking a compromise figure — “is not reasoned decisionmaking.” Since the other standards were so intertwined with the debt repayment test, the judge struck them down as well, leaving remaining only the disclosure provisions of the rule.
The APSCU and the for-profit industry have hailed the judge’s decision as a victory. But the industry needs to understand that it may be just the first of a series of regulatory battles. The court’s opinion read largely like an opinion favoring the DOE. Notably, the judge stated that “the Department has gone looking for rats in ratholes — as the statute empowers it to do.” And the court squarely upheld the DOE’s regulatory authority to go about enforcing something just like the Gainful Employment rule, so long as the basis is grounded in sufficiently reasoned standards.
It is not clear yet how the DOE will proceed, and whether it will go about another round of rulemaking. But the court’s opinion provides ample incentive for the administration to take another turn at Gainful Employment.
The Association of Private Sector Colleges and Universities is taking on the Department of Education. The organization, which represents some 1500 for-profit education institutions, filed its second lawsuit this year to contest the agency’s new regulations aimed at career colleges. The ASPCU won one and lost two in the first suit, and is currently appealing the rulings against it. The most recent suit, filed last week in federal district court in D.C., challenges the DOE’s “gainful employment” rule (as well as two related regulations).
The rule requires colleges to demonstrate that at least 35 percent of students are repaying their loans, or that loan repayments do not exceed either 30 percent of students’ discretionary income or 12 percent of their total earnings. Schools failing to meet all of these requirements in three out of four years will no longer be able to accept student payment with federal loans.
In a hefty complaint, ASPCU attacks the rule on a number of grounds, contending flaws in the regulatory process and agency overreach. The complaint notes that the DOE’s Inspector General is investigating problems with the rulemaking, while members of Congress have called for congressional investigations and review by the DOJ and the SEC regarding allegations of insider trading involving DOE officials. And the complaint’s allegations come a day before the Daily Caller’s release of an email suggesting potential witness tampering by Senator Tom Harkin’s office during congressional hearings into (or rather, against) for-profit education institutions.
Never mind the questions of impropriety…From a policy perspective, two of the more interesting arguments in the complaint involve the gainful employment rule’s anticipated consequences:
(1) The rule could lead to an unfair and disparate impact on prospective students from low-income, minority and other traditionally underserved student populations. APSCU argues that the rule, which ties federal funding to the financial success of graduates, will force institutions to restrict enrollment, eliminating education opportunities for those students least apt to obtain profitable jobs post graduation. Those most affected likely will be students from economically underserved areas “because it is those student populations who are the most at risk for failing the Department’s arbitrary tests.”
This potential consequence demonstrates the importance of carefully analyzing the impact of any new law or regulation while in the drafting phase. Certainly advocates of the gainful employment rule have the intention of helping traditionally underserved students; they are undoubtedly thinking of those students when devising a rule to address the problem of students being saddled with unreasonable debt. But this rule may have unintended consequences. Students won’t have to worry about student loan debt when deprived of the opportunity to invest in an education.
(2) The rule will bind educational institutions to the future employment decisions of their graduates, decisions that are beyond the institutions’ control. The gainful employment rule ties access to federal funding to graduates’ actual repayment of federal loans or to their ability to repay those loans (the latter being a reflection of how much money the graduate makes in their post-education career). The tricky part is, colleges do not have power over a graduate’s actions – they can’t control whether a graduate defers loan repayment where able, defaults, or … backpacks across Europe instead of accepting a lucrative job.
Educational institutions prepare students for employment; they cannot guarantee employment (a thing impossible, especially in this economy) or compel employment. The gainful employment rule puts colleges in the untenable position of warranting students’ future behavior. Such an obligation would be problematic in the context of a voluntary agreement between parties; with a federal mandate, it places the schools in an impossible position.