The higher education system in America needs significant reform. Twin challenges of high cost and low quality require attention from federal policymakers—who oversee tens of billions in federal aid to colleges and universities annually. In recent years, some policymakers, most notably during the Obama Administration, have singled out for-profit universities for additional federal regulation. However, targeting for-profit colleges, many of which are meeting the needs of students historically underserved by “traditional” universities, is not the way to improve outcomes sector-wide. The vast amount of taxpayer subsidies that Congress pours into the entire higher education sector is the issue that deserves scrutiny, and should be the primary focus of any Higher Education Act (HEA) reauthorization. Additionally, as this Issue Brief explains, regulations, when promulgated, should be applied evenly to all universities. The entirety of higher education needs improvement, which will not be achieved by singling out for-profit colleges.
Targeting For-Profit Colleges through Heavy-Handed Regulations: An Unfair Federal Cudgel
Two regulations have made it clear over the past decade that the so-called for-profit sector has been unfairly targeted, and as such, deserves a reprieve. The first is the Obama-era gainful employment rule; the second is the 90/10 rule.
Gainful Employment (GE). The Department of Education is working to overhaul the “gainful employment” regulation put in place during the Obama Administration that especially targeted for-profit colleges, requiring their graduates to achieve government-defined debt-to-earnings income ratios. The Trump Administration’s Education Department suspended the rule, which had gone into effect in July 2015, and is not applying it while the agency works to rewrite, or eliminate, it.
Under the rule, career colleges (and some certificate programs at nonprofit colleges) were to lose access to federal student loans and grants if their graduates had debt-to-earnings ratios above a defined percentage of their income (12 percent of a graduate’s total earnings or 30 percent of his discretionary income). Programs that failed the measure twice in a three-year time span were to lose access to federal funds.REF This was a government-knows-best policy that, had it continued, would have limited choices for students.REF
The GE rule was clearly designed to affect certain types of schools, as it was not applied evenly across all institutions. Degree programs at traditional four-year colleges, for example, were exempt from it. This suggests that the rule’s application to for-profit schools was more about politics than prudent policy.
For example, default rates among students at community colleges are comparable to those at career colleges, despite the fact that students leave community colleges with less debt, on average,REF meaning they should be expected to have lower default rates. And although it is true that career and vocational colleges are more likely to have lower loan-repayment rates than traditional four-year colleges, as Jason Delisle and Preston Cooper point out, the majority of students who attend a college with a low loan-repayment rate attend a public college.REF That is the case because only 9 percent of undergraduate students attend a for-profit college, while 74 percent attend public universities.REF
When private colleges are included in the mix, nearly two-thirds of students who attend schools with very low repayment rates (below 25 percent) attend public and private colleges, not for-profit schools.REF With regard to certificate programs, there is a 25 percentage point gap in favor of for-profit colleges when it comes to certificate completion. While just 45 percent of students pursuing a certificate at a public college had earned it within three years, that figure rises to 70 percent for students at for-profit colleges.REF
Degree programs at public and private nonprofit colleges were exempt from the GE rule, meaning that, according to higher education scholar Preston Cooper, five-sixths—or more than 80 percent—of students attended schools that were insulated from the regulation. As he explained, “treating educational programs differently in regulation on the basis of credential type or the college’s tax status not only fails to protect a majority of students, but gives exempted programs an unearned leg up at the expense of programs subject to the rule.”REF
Many students seek out for-profit colleges or vocational training as a means of establishing a meaningful, long-term career in a critical field. The government should not penalize them for that choice. The GE rule could hurt entrepreneurs if they have a bad year trying to get a start-up business off the ground; could unfairly penalize schools that serve a higher proportion of women, many of whom may exit the workforce as they start a family; and could disproportionately affect low-income and minority students, many of whom choose career and technical colleges.REF
Senator Mike Enzi (R–WY), then the ranking Member of the Senate Health, Education, Labor and Pensions Committee, noted in a 2011 statement on the GE rule that “many of these affected schools provide important training for those who choose to become mechanics, plumbers and electricians. This rule uses a heavy hand against these schools and makes it more difficult for Americans to access educational opportunities.”REF
90/10 Rule. The 90/10 rule is another regulation that targets the career college sector. It stipulates that no more than 90 percent of an institution’s revenue may come from federal funding. The rationale behind the rule, which dates to 1992 and began as an 85/15 rule, has merit: Quality higher education institutions should be able to secure non-federal funding from a variety of sources. Low-quality providers are unlikely to attract private financing or philanthropic funding, and as such, federal taxpayers should not be on the hook for funding programs of questionable value.
Yet, as with gainful employment, the 90/10 rule only applies to the for-profit sector. As Mark Kantrowitz found, if the federal government applied the 90/10 metrics to all schools of higher education, which would be the fairer application of the rule, 80 percent of public two-year colleges would fail the test, as would 40 percent of public four-year colleges.REF
Although the percentage of colleges that would fail the 90/10 rule if applied evenly is still a matter of dispute,REF it is a proportion above zero—prima facie evidence that the rule as currently applied allows some “traditional” schools off the hook, while penalizing similarly situated for-profit schools.
There is also a debate about whether this rule is even an accurate measure of school quality, or instead serves as a proxy for poverty, reflecting the proportion of students who need financial aid to offset the cost of tuition. The rule could have led to other unintended consequences, as broad regulations tend to do. It may have encouraged universities to raise their tuition in order to increase the denominator in the 90/10 calculation and appear less dependent on federal subsidies.
Impact on the Military. Currently, the benefits provided to military service members and veterans through programs such as the G.I. Bill are not counted in that 90/10 rule. Some want to count this tuition assistance, which the Defense Department uses as a recruiting tool, in the “90” of 90/10. Eighty-five percent of active-duty service members who receive the earned benefit of tuition assistance take some online courses.REF Counting these earned benefits in the 90/10 rule could be devastating for higher education access for service members, who could be dropped by schools in order to avoid a bias on the school’s 90/10 numerator.
If gainful employment and 90/10 are good policies, they should be applied to all types of universities, regardless of tax status, not just to the for-profit sector. As Education Secretary Betsy DeVos said in a speech in 2017, “Financial aid should not be withheld simply because [students] pursue a non-traditional path. Politicians and bureaucrats should not dictate to students when and how they can learn.”REF Better yet, instead of layering on more and more regulations to contain a taxpayer exposure problem created by Washington in the first place, Congress should cut—or at the very least significantly cap—federal student loans.
Regulations Aimed at the For-Profit Sector Ignore Broader Challenges Facing Higher Education
Poor student outcomes are found across the higher education sector, and should not be excused for certain schools based on their tax status. Both the gainful employment rule and the 90/10 rule ignore larger issues affecting all of higher education today, not the least of which is the $1.5 trillion in outstanding student loan debt to which taxpayers are exposed.
Indeed, 57 percent of Americans say that higher education is not a good value proposition, and 75 percent say that it is too expensive for average Americans to afford, according to a Pew Research Center study conducted in 2011.REF One-third of college graduates are “underemployed” in jobs that do not require a bachelor’s degree,REF suggesting, as economist Richard Vedder puts it, that American taxpayers are “mal-invested.”REF Vedder explains it this way: “[I]t takes more resources today to educate a postsecondary student than a generation ago…. Relative to other sectors of the economy, universities are becoming less efficient, less productive, and, consequently, more costly.”REF
Instead of trying to centrally plan higher education through regulations that fail to address deeper systemic problems, Congress should eliminate the PLUS loan program and place aggregate caps on the Direct Loan program, in order to make space for private lending to re-emerge. If regulations are applied, they should be applied evenly to all universities, regardless of a school’s tax status. Congress cannot regulate its way to higher education quality. Fostering excellence and driving down costs require structural reforms to the sector, not the least of which is cutting off the open spigot of federal aid to universities.
Lindsey M. Burke, PhD, is Director of the Center for Education Policy, and the Will Skillman Fellow in Education, of the Institute for Family, Community, and Opportunity, at The Heritage Foundation.