Education Dept. Will Release Stricter Rules for For-Profits but Delays One on 'Gainful Employment'

John Gurzinski for The Chronicle

Vendors at last week's annual meeting of the Career College Association advertise services that help for-profit colleges with marketing and enrollment management—activities that would receive closer scrutiny under new federal rules.
June 15, 2010

After an intense lobbying effort by for-profit colleges, the Education Department announced Tuesday that it will postpone the release of a rule that proprietary institutions said would shutter thousands of their programs.

The rule, which would cut off federal student aid to programs whose graduates carry high student-loan debt relative to their incomes, is one of 14 that the department and college stakeholders have been negotiating over the past eight months. The other regulations, including one that would tighten a ban on incentive compensation for college recruiters, will be made public Friday.

In a call with reporters Tuesday, an Education Department official said the agency still plans to hold for-profits accountable for preparing their graduates for "gainful employment," but needs more time to develop an appropriate measure of that outcome. The official said the proposal will be released later this summer, and will most likely be included in a package of final rules due out in November.

"We have many areas of agreement where we can move forward," Arne Duncan, the U.S. secretary of education, said in a statement. "But some key issues around gainful employment are complicated, and we want to get it right, so we will be coming back with that shortly."

The delay gives for-profit colleges more time to fight the department's proposal to bar aid for programs in which a majority of students' loan payments would exceed 8 percent of the lowest quarter of graduates' expected earnings, based on a 10-year repayment plan. The colleges have already spent hundreds of thousands of dollars pushing an alternative that would require programs to provide prospective students with more information about their graduates' debt levels and salaries.

Their lobbying and public-relations blitz has met with mixed success. While the department has not yet abandoned plans to measure graduates' debt-to-income ratios, the rules that will be released Friday would require programs to disclose their graduation and job-placement rates and median debt levels—the approach favored by for-profits.

A Welcome Delay

Trace A. Urdan, an analyst with Signal Hill Capital Group, said the delay in releasing the rest of the rule suggested that "the department has heard the message from industry and Congress, and that there was some overreaching."

"Clearly, trying to gather more data before proceeding is being responsible," he added.

For-profit colleges have complained that the department has refused to release the data it used to justify drafting the rule, and have questioned whether they even exist.

The fight over gainful employment comes amid increased federal scrutiny of the for-profit sector, which educates a growing share of students and is highly dependent on federal student aid. On Thursday, the education committee of the U.S. House of Representatives will hold a hearing to examine whether accrediting agencies are doing enough to ensure that students studying online are getting an adequate amount of instruction for the degrees they earn. The hearing will focus on a recent report by the Education Department's Office of Inspector General that questioned the decision of the Higher Learning Commission of the North Central Association of Colleges and Schools, one of the nation's major regional accrediting organizations, to approve accreditation of American InterContinental University, a for-profit college owned by the Career Education Corporation. The Senate education committee follows with a hearing next week focused on the growth of the for-profit sector and the risks that may pose to taxpayers.

In a statement issued Tuesday, the chairman of the Senate committee praised the proposed rules. "The federal government must ensure that the more than $20-billion in student aid that these schools receive is being well spent and students are being well informed and well served," said Sen. Tom Harkin, Democrat of Iowa. "For-profit colleges must work for students and taxpayers, not just shareholders."

Meanwhile, a top Republican on the panel, Sen. Lamar Alexander, of Tennessee, called the disclosures that would be required by the rules that will be released on Friday "much better than the first approach on gainful employment." Mr. Alexander, a former secretary of education, had threatened to offer an amendment to withhold the funds needed to put the rule into effect if the department followed through with its original proposal.

"Secretary Duncan is focusing on a real problem," he said. "Some students are borrowing too much and not getting enough value for what they are paying."

Tougher Stance on Recruitment

But if the department is showing signs that it may soften its stance on gainful employment, it has dug in its heels on another controversial issue: recruiter compensation. During negotiations over the rules, the department proposed striking a dozen "safe harbors" from a ban on compensating recruiters based on student enrollment. It followed through with that proposal in the rules due out Friday, while promising to provide guidance on what is—and isn't—allowed under the ban.

Congress outlawed incentive compensation in 1992 following reports that some trade institutions were enrolling unqualified students to receive their federal student-aid dollars. By prohibiting commissions, lawmakers hoped to discourage recruiters from signing up students for courses they couldn't handle. Under the law, colleges may not provide "any commission, bonus, or other incentive payment" to recruiters or admissions officers based on their success in securing enrollments or financial aid.

A decade later, the Education Department convened a committee to clarify the rules, which for-profit colleges had long complained were unclear and ambiguous. When the panel disbanded without reaching consensus, the department took action on its own, issuing regulations that outlined the 12 "safe harbors" from the law.

In the years since the safe harbors were created, some of the largest for-profit institutions have come under scrutiny by state and federal regulators, and a number of former recruiters have filed lawsuits under a whistle-blower law, the False Claims Act, that accuse colleges of improperly compensating recruiters. In one of the most high-profile lawsuits, the University of Phoenix recently agreed to pay $67.5-million to settle a False Claims lawsuit filed by two former recruiters.

Pauline Abernathy, vice president for the Institute for College Access & Success, said the changes in the proposed rule "appear to bring the department's policies more in line with federal law banning incentive compensation."

"These loopholes have led to high-pressure and deceptive sales tactics that can leave vulnerable consumers with staggering debt and no way to pay it back," she said.

But Harris N. Miller, president of the Career College Association, said he was disappointed that the department didn't include specific guidance in its rule.

"This is going to harm students and make lawyers very happy," he said.

Most of the other regulations in the package to be released on Friday are aimed at protecting students and safeguarding taxpayers' investment in federal student aid. In many cases, the language mirrors agreements reached during the rule-making sessions.

They include rules that would:

  • Require colleges to evaluate the validity of a student's high-school diploma if either the college or the secretary of education believes that a closer examination of the diploma is warranted.
  • Strengthen the department's authority to take action against institutions engaging in deceptive advertising, marketing and sales practices.
  • Clarify the states' responsibility in approving and monitoring postsecondary programs.
  • Define a credit hour and establish procedures for accrediting agencies to determine whether a college's assignment of a credit hour is acceptable. The proposal also allows for a credit hour to be measured through learning outcomes instead of the customary use of "seat time."

The public will have 45 days to comment on the rules, which are expected to be finalized by November 1 and take effect in July 2011.