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Harkin calls gainful employment rules a 'modest first step'

senate hearing on for-profit schools

WASHINGTON--Not yet a week old, the controversial new Education Department regulations that set benchmarks for career-education institutions to qualify for federal student-aid funding and enact new performance measures came under scrutiny today on Capitol Hill, with a key Democrat pledging to introduce legislation to strengthen the rules.

Illinois Democrat Tom Harkin (D-Iowa), who chairs the Senate Health, Education, Labor and Pensions Committee, called the rules a "modest first step" toward imposing a framework of accountability on the for-profit higher-education sector, while announcing his intent to pursue "new legislative protections for students and taxpayers."

At the heart of the investigation Harkin and his committee have been leading for more than a year are the lending practices of for-profit institutions, which account for 12 percent of all U.S. higher education students, 26 percent of all student loans and 46 of all loan defaults, according to the Department of Education. Data from the department also shows that students at for-profit schools borrow on average more than their peers at nonprofit public and private institutions, with much of that money coming in the form of federal guaranteed loans, Pell Grants and other taxpayer-funded programs. The department estimates that more than 25 percent of for-profit institutions receive 80 percent of their funding from federal student-aid programs, and that students who earn associate's degrees from those schools graduate with a median federal loan debt of $14,000, while the majority of community college students do not take any loans.

For Harkin, the elevated default rates of those borrowers, both in the short and long term, are a warning sign about the industry.

"I believe it's clear that more needs to be done to ensure that taxpayers dollars are used wisely, to ensure that for-profit colleges are actually fulfilling their commitment to providing quality education that leads to better jobs and economic advancement," Harkin said at a hearing Tuesday morning. "I believe it's going to take more than these rules."

Gainful employment

Last week, the Department of Education released the final version of the so-called "gainful employment" regulations, which, among other things, outlined a set of baseline criteria that all career-oriented institutions, both nonprofit and for-profit, must meet in order to qualify for federal loans and other forms of government funding.

Under the new regulations, a career institution would need to meet one of three benchmarks to remain eligible for federal funds. The school would have to demonstrate that at least 35 percent of its students are repaying their loans, that a typical graduate has an estimated debt-to-discretionary-income ratio of 30 percent or less, or that the typical graduate's estimated annual loan burden is less than 12 percent of his total earnings. A program meeting any one of those conditions would be considered to lead to gainful employment.

In many ways, the regulations represented a modest victory for the for-profit education sector, which had been lobbying vigorously to keep the most stringent proposals out of the final rules.

The gainful employment regulations, which won't take effect until July 1, 2012, establish a sort of repeat offender system for withholding federal funds. The first time a school fails to meet the minimum debt measures, it will be obligated to provide notice to its students about why it fell short and outline a plan to improve its numbers. Should it miss the debt measure a second time in three years, it must issue a notice to students warning that their loan payments may not be repayable upon graduation, explaining that the program is at risk of losing federal funding and advising them of their transfer options. A third failing mark within four years will disqualify the program for federal student-aid funding and bar it from reapplying for eligibility for three years. That three-strikes policy means that the first year a career program could hypothetically lose eligibility for federal student aid would be 2015, and only after failing to meet any of the minimum debt measures each of the three years following the effective date of the rules. Under the original proposal, a school could have lost its eligibility immediately upon failing to meet the minimum debt measure.

"It's pretty clear that the teeth have been taken out of the proposed rules," said Sandy Baum, an independent higher education analyst and consultant based in Chicago who testified at today's hearing.

Too lenient?

Baum and many consumer and education advocates were disappointed that the rules did not go farther, but Education Undersecretary Martha Kanter insisted that the gainful employment regulations were not meant to be punitive, but only to bring the institutions that failed to deliver the practical skills and training that they advertise in line with the best practices of the for-profit industry.

"What we wanted was a rule that would go after the bad actors," Kantor said. "We want the sector to succeed. I think that was one of the fundamental tenets of the rule. We've got 11 percent of students in these programs. We've got to create a model that's going to help them improve and actually target the worst-performing programs and either have them improve or eliminate their eligibility."

Indeed, several of the senators touted the value of the for-profit education sector as an institution, but expressed concern over the wide swings in recruitment practices, disclosure and preparation for the job market. The new Department of Education regulations are meant to iron out some of those disparities, and carry numerous requirements directing schools to disclose total program costs, loan repayment rates and other information that would seek to demystify the process of selecting a career program for students and curb deceptive recruitment policies.

No representative from the for-profit industry was on hand to defend against a battery of charges from a panel of witnesses who roundly criticized what they described as unsavory lending practices that left students saddled with debt and without the skills and certifications needed to make them viable in the job market, leading to soaring loan default rates that ultimately fell to the taxpayers. Nor were any Republican members in attendance at this morning's hearing, the fifth the HELP committee has convened to examine for-profit career colleges amid Harkin's investigation. Some GOP members of Congress, joined by a minority of Democrats, have backed proposals to prevent the regulations from coming into effect, including a spending amendment that cleared the House in February that would have prohibited the department from using federal funds to enforce the rules.

The Association of Private Sector Colleges and Universities (APSCU), a leading industry group, said it was pleased with the revisions that the Education Department had made in its final rulemaking, which came after receiving an unprecedented 90,000 comments from the public. At the same time, the group said it believed the department had overstepped its statutory authority, and worried that the one-size-fits-all rules would fall short of their intended goal and adversely affect the good actors in the field.

"Our concern is that the regulation will still penalize programs with great outcomes while allowing under-performing programs to continue," APSCU said in a statement, adding that it was mulling its next steps pending its own analysis of the rules. "We need to trust, but verify the impact, of the new regulation."

Spokespeople for the APSCU did not immediately respond to requests for comment elaborating on the group's statement.