Should For-Profit Colleges Face Stricter Regulations from Uncle Sam?

Defaults on student loans are on the rise. And according to current data, a main cause may be the recent surge in enrollment at for-profit colleges.

In recent years, the sheer number of these schools hasgrown considerably, with enrollment climbing from about 365,000 students to almost 1.8 million. For-profit colleges draw the greater part — sometimes 90% — of their funding from federal aid. Since higher enrollment equates to more money, these for-profit schools have a strong economic incentive to encourage students to enroll. Unsurprisingly, a growing body of evidence suggests that this dynamic has led for-profit colleges to encourage students to take on heavy debt loads, often enticing students with false assertions about how much money they’ll earn upon graduating.

It is crucial that policy makers address the question of how the government ought to support these institutions, both to ensure fairness in policy making and, most importantly, to protect students. Heavily indebted students already face enormous financial strain, and the sputtering US economy, not to mention several decades of limited job creation, according to many pundits, will only make matters worse. If these students fail to complete their degrees and are forced to compete in the job market with college graduates, they’ll certainly face even greater obstacles.

Yet for-profit colleges portray themselves as champions for working people and minorities. The new ad campaign that Corinthian Colleges, Inc., a California-based corporation, rolled out in the New York Times and Wall Street Journal this week clearly indicates how the company seeks to position itself as sympathizing with low wage workers. But when situated within its pattern of abusive behavior — in 2007 alone, Corinthian was both sued by the State of California for exaggerating its record of placing students in well-paying jobs and federally investigated by the U.S. Department of Education for “waste, fraud, and abuse of federal education dollars” — this positioning looks downright fraudulent.

Posing as prospective students at 15 for-profit institutions, agents from the Government Accountability Office (GAO) recently discovered that admissions officials at for-profit colleges often engaged in fraudulent, deceptive or dishonest marketing tactics. Admissions officials also lied about the total costs of their schools’ programs, exaggerated the employment opportunities and salaries that prospective students could expect after graduation, and sometimes told students that they could not speak with financial aid counselors until after they had enrolled.

In 2009, students at for-profit colleges received more than $4 billion in Pell Grants and more than $20 billion in federal loans. These same students, however, defaulted on their loans at a rate of 11.6%, compared with 6% of students at public non-profits and 4% at private non-profit colleges. According to the Department of Education, in 2008-2009, students at for-profit schools were 26% of federal student loan borrowers, yet they made up 43% [pdf] — almost half — of defaulters.

The above findings reflect the moral hazards that emerge when a private for-profit industry thrives on federal subsidies without appropriate oversight. As a result of the GAO investigation, the Department of Education has recently proposed new regulations that aim to tighten eligibility requirements that private for-profit colleges must meet before receiving federal student aid. If these regulations are enacted, for-profit colleges will only be eligible to receive federal aid if 1) 45% of their former students are paying down the principle of their federal loans or 2) their students graduate with a debt-to-earning ratio of less than 8%.

The direct impact of tighter regulation would cause 5% of for-profit colleges to become ineligible for federal aid. In addition, 55% of for-profit programs would be required to inform students that they may not earn enough after graduation to repay their loans. Perhaps this will put us on the right track to reclaiming an educational aid system intended to empower students — not saddle them with a lifelong burden of debt.

Until next week,

EARN’s Policy Team

Photo credit: alancleaver_2000