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Experts: Fight Isn’t Over Regarding New Regulation Aimed at For-profit Colleges

WASHINGTON ― A gainful employment regulation announced by the Department of Education last week as part of the Higher Education Act of 1965 will have specific ramifications for some for-profit colleges. The regulation is an attempt to ensure that educational programs will lead to gainful employment in recognized occupations.

A panel of experts convened on Wednesday at the Center for American Progress to discuss the impact the regulations would have on for-profit colleges.

Roughly 1,400 programs, 99 percent of which are housed at for-profit colleges, serving 840,000 students are projected to fail when the regulations go into effect on July 1. Programs whose graduates have annual loan repayments that equate to 12 percent of their total earnings and greater than 30 percent of their discretionary earnings will fail under the regulations.

“We see that some of these programs are leaving students with debts that they cannot afford to repay, and, in fact, about a quarter of graduates of gainful employment programs earn less than a full-time minimum wage worker,” said James Kvaal, deputy director of the White House Domestic Policy Council, in the panel’s keynote address.

Kvaal added that for-profits, which enroll about 11 percent of students, produce more than 40 percent of student loan defaults.

Under the new regulation, students will not be allowed to use federal financial aid to pay for failing programs. This is bad news for those for-profits that derive a substantial portion of their operating revenue from federal financial aid.

Corinthian College’s swift fall from grace is indicative of the dependency of some for-profits on federal dollars. When the federal government disrupted the flow of federal funds to the for-profit Corinthian College for a period of 21 days this summer, Corinthian went into a financial tailspin leading to the closure of 12 of their campuses and the eventual sale of 85 more.

The final draft of the regulation did not include cohort student loan default rates for different programs, a critical measure in an earlier draft published in March. Cohort student loan default rates were dropped from the regulation due to lobbying from community colleges.

“My objective to the gainful employment (regulation) is that it has, from the beginning, been largely targeted at one sector. Which, yes, there are problems in the for-profit sector, but when you look at community colleges, which serve a similar population as the for-profit sector, you see a lot of similar things,” said Kevin James, research fellow at the Center on Higher Education Reform and the American Enterprise Institute. “You see high loan default rates, and extremely low graduation rates.”

Community colleges have come under fire for some of the same problems as for-profits. But community colleges differ from for-profits in several important ways. For one, community colleges cost substantially less than for-profits. Though for-profits tend to cost much more, their value is questionable. Some degrees at some for-profits are not accredited by agencies recognized by employers.

Trace Urdan, senior analyst at Wells Fargo Securities LLC, voiced concerns that investors may grow wary of the for-profit sector due to upheaval leading up to and after the implementation of the regulation. “One of the things that Wall Street really likes is stability,” Urdan said.

While the existence of a regulation does not represent a deterrent to investors, Urdan said, other aspects of the regulation would. Namely, the Department of Education’s planned interagency task force to monitor for-profits. The planned interagency task force is a result of the new regulation.

“I think the thing that’s probably more alarming to investors is the overall atmosphere. Frankly, the task force is far more discouraging to investors,” Urdan said. “The task force sounds like a permanent cabal of federal agencies who are going to come together on whatever regular basis and find ways to go after the sector.”

Anne Johnson, executive director of Generation Progress, said that an interagency task force would be beneficial. “I think the creation of this interagency taskforce is hugely important. For-profit colleges are being investigated in 37 different states by attorney generals. The Department of Justice, the CFPB (Consumer Financial Protection Bureau), have all looked into for-profit colleges. So I think that coordination element is hugely important,” Johnson said.

Whether the regulation will make it to July 1 intact remains to be seen.

The Department of Education attempted to create a gainful employment rule in 2011, but was dismantled in a lawsuit brought by the Association of Private Sector Colleges and Universities (APSCU), a lobbying group representing for-profits. Urdan warned that the Department of Education ought to expect a similar reaction.

“I think that it’s probably inevitable that there’s going to be some kind of lawsuit,” Urdan said.

As to whether or not the regulation will slip by a newly Republic Senate and Congress, Kvaal said, “I think the issue of college costs and student debts generally is a very salient one. It’s one that members of Congress have taken a lot of interest in. I think that there is a very strong case, substantively, for us to make to Congress.”

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