Gainful Employment Rule Gutted and Adopted

Tamar Lewin of the NYT and EduBubble believe ED has failed to rein in for-profit higher education.

“We believe that very few programs will be forcibly closed by our standards,” Secretary of Education Arne Duncan said. “We want to give people a chance to reform. As a country, we need this sector to succeed. This is not about ‘gotcha.’ ”

I have nothing against for-profit higher education in principle so long as the students pay out of pocket (and I see no reason to treat nonprofit higher education differently). If they’re thriving on federally originated non-dischargeable student debt with no increase in quality, then the ‘gotcha’ is on taxpayers.

[D]epartment officials estimated that 5 percent of the 13,155 for-profit programs covered by the rules, and 1 percent of the 42,290 public and nonprofit programs, would lose their eligibility for student aid.

A program would lose eligibility for federal aid only if: fewer than 35 percent of its graduates are repaying principal on their student loans three years out, and, for the typical graduate, loan payments exceed 30 percent of discretionary income as well as 12 percent of total earnings.

So even if a program loses access, students can turn to private student loans, which have been completely covered by the ‘undue hardship’ exception to dischargeability since 2005. Then the Times heralds the revenge of lemon socialism.

[T]he for-profit education sector had many of the “same characteristics of what happened with subprime housing and securitization, namely that they can capture all the upside of increasing volume while shifting all of the downside to somewhere else, which is students and taxpayers.”

[National Economic Council director Gene Sperling] said the rules would “only decrease access to very weak programs that leave students with a crushing debt burden.”

In other words, don’t expect student debt to drop for a while.

[UPDATE]

At Innovations, Richard Vedder attacks the Gainful Employment rule for different reasons. Although I disagree that the Obama Administration is particularly anti-business (I think businesses are on a general hiring strike and don’t want to make money), I largely agree with Dr. Vedder’s point that tax status should be irrelevant to regulating aid. Indeed, I wouldn’t be able to blog on legal education if that were the case.

A case can be made to restrict federal financial aid. I would go even farther—an excellent case can be made to eliminate such aid. An even more compelling argument can be made that we should not be trying to expand higher education enrollments. But if the U.S. government is going to try to expand higher education and distribute aid to students, it should not base restriction of that aid on the ownership structure of the institution.

[UPDATE]

Dean Baker spanks the Post:

The Washington Post, which is part of a corporation whose primary income comes from for-profit colleges, told readers that new regulations on student loans would:

“effectively would shut down for-profit programs that repeatedly fail to show, through certain measures, that graduates are earning enough to pay down the loans taken out to attend those programs.”

[A]nyone who wants to would still be able to attend any for-profit college they chose. They could even borrow money to do so. They would just be unable to get a subsidized loan from the government for this purpose.

The problem is that private student loans aren’t dischargeable in bankruptcy and thus place far more risk on students than on lenders. I wonder if for-profit colleges will start auto-financing.

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3 Responses

  1. Only 35% of graduates need to be paying back their federal loans THREE years out??? Seriously?

    So if 65% of San Fransisco School of Cosmotology default on their loans, tax payers still give the institution money? WTF!??!

    • That doesn’t mean they have defaulted. They could be in a deferment or a forbearance, or they could have had their loans discharged (death/disability), or in the process of discharge, including those who try (largely unsuccessfully for bankruptcy discharge). It could also mean they were defaulted but are no longer defaulted and are now successfully paying on their loans. (The new reg says that borrowers once in default cannot be in the numerator of the repayment rate even if they later begin successfully paying down their balances.)

  2. The reason I haven’t bothered joining in the gainful employment debate is that even if passed as written, it never had a chance of actually improving the lot for students.

    This is because the Department of Education would see to it that at most, only a few schools would ever be penalized. Truly the corruption and anti-public culture that has dominated the Department of Ed for so long (arguably since its inception).

    This is a “bad government” problem. ED is a captured agency. To give just one example: when it surfaced that multiple lenders were pulling a billion dollar billing scam on the Department, not only did the Department do nothing, it actually took the whistleblower filing a lawsuit against the Department to cause any kind of justice to happen to the lenders. That is what happens when Sallie Mae good ole boys are brought in to run a government lending system. That, and much more.

    The only thing I can identify that would help would be to reverse the Departments financial incentive on defaulted loans (currently it is making, not losing money on defaults), this would at least be a start for motivating the Department to actually want a low default rate. Clearly, however, the people currently running the Office of Federal Student Aid would have to be replaced by people who are interested in serving the public.

    The first part requires an act of Congress that returns standard bankruptcy protections to federal student loans. Even with this there is a good chance the Feds will find a way to ultimately profit on these loans (particularly under the new program, where they have taken owenership of the guarantee function and lending function), but this is a question for another time.

    The second part requires, simply, someone with a backbone, passion for true public service, and a leadership position at the Department of Education (I had hoped people there would see the human suffering that they are causing and simply decide to start acting right, but that hasn’t happened in six years, and there is zero indication that these people will change, except to become even harsher towards the borrowers).

    This proven corrupted agency offers the Obama Administration a golden opportunity to deliver on their promise for “better, not more, government”. To see this tells me they would rather pass feckless laws like this, and call it good. Same comments apply to Congress.

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