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Education Department Continues crackdown on for-profit colleges

The U.S. Department of Education has announced proposed regulations aimed at curbing fraud in student loan borrowing at for-profit colleges and universities, reopening a long-running controversy about those institutions’ level of culpability for high levels of student-loan defaults.

“We won’t sit idly by while dodgy schools leave students with piles of debt and taxpayers holding the bag,” said John King, U.S. Secretary of Education, in a statement announcing the proposed regulations on Monday. “All students who are defrauded deserve an efficient, transparent, and fair path to the relief they are owed, and the schools should be held responsible for their actions."

The colleges’ defenders, though, say they serve a financially riskier clientele who otherwise would lack access to higher education.

The new regulations were created, the department said, to help students who borrowed money to attend for-profit schools, but who believed they were misled or lied to about future job prospects by those schools, to have an easier path to student loan debt forgiveness. Those schools that were accused of fraud or misrepresentation of things like future job placement rates and prospects from employers would also be held more accountable as the new rules would require them to notify current and prospective students about such claims.

Historically, some organizations, including the National Urban League, have long opposed the department's continuing efforts to regulate for-profit lending, saying that it could limit access. "We are concerned that students who rely on federal loans might no longer have access to financial aid to attend the schools of their choice because the government will deny federal funds to students who attend for-profit institutions that can't comply with the proposed rule," wrote Marc H. Morial, president and chief executive officer of the National Urban League, in a 2011 Washington Post editorial.

The League did not respond when asked if those objections to new regulations still apply.

Writing in a May 2015 issue of Forbes, contributor Jeffrey Dorfman also decries “the federal government takeover of student lending.” He argued that “people with much lower incomes than the average college graduate pay off car loans as a routine matter. Student loan debt becomes a problem when the borrower wants to spend their newly increased incomes on nice food, clothes, cars, housing and vacations rather than on their student debt payments.”

Dorfman, in Forbes, holds the federal government to blame for giving out the money and then bailing out borrowers. “If the federal government actually considered the ability to repay student loans before passing out money, many of the for-profit colleges would have been cut off long ago because their high default rates and low graduation rates make clear the risky nature of lending money to their students. Loaning money to people who cannot repay it is not doing them a favor.”

The department's proposed new rules would also require for-profit schools to create a fund to cover future claims and would prohibit them from including in student-enrollment contracts mandatory clauses of arbitration as well as gag rules that would preclude students from talking publicly about how they fared in the job market.

“These regulations would prevent institutions from using these clauses as a shield to skirt accountability to their students, to the Department and to taxpayers,” Undersecretary of Education Ted Mitchell added in a statement Monday. “By allowing students to bring lawsuits against a school for alleged wrongdoing, the regulations remove the veil of secrecy, create increased transparency, and give borrowers full access to legal redress."

The largest association representing for-profit schools responded to the announcement, saying the proposed regulations singled them out for tougher fiscal scrutiny than their non-profit peers in higher education. It also said that such regulations would limit access for many students to career education programs, and charged that the regulations served to advance the ideology of the Obama administration in its final days.

"We agree that poor performing institutions, as well as those institutions that are financially at risk, should be monitored closely to protect students,” Steve Gunderson, president and CEO of Career Education Colleges and Universities, said in a statement. “But what the department fails to acknowledge is that these issues exist across all of higher education, not just private sector institutions.”

He added: "The truth is the steps the Department is taking today puts the future of career education in America at risk …The complex and burdensome nature of this regulation will crush career education with financial requirements not imposed on others in higher education – including institutions that have lower graduation rates and higher default rates. As the final months of the Administration wind down, the Department is advancing an ideological effort instead of finding ways to work co-operatively with the Congress and higher education stakeholders to advance meaningful reauthorization of Higher Education Act.”

In April, Gunderson, who has called out the administration for over-regulation, wrote to King, the education secretary, asking that the administration delay penalties on for-profit colleges associated with its “gainful employment” regulations for a year, adding that the debt-to-earnings formulas used to measure a student's long-term earning potential were flawed and also hampered by the current job market. His letter came after a federal appeals court upheld a lower court's ruling in favor of the administration's regulations that defined debt-to-earning rates for post-graduates.

A study released in September 2015 by the Brookings Institution found that for-profit colleges, and also some community colleges, helped to ramp up student-loan defaults over the past decade.

Researchers Adam Looney of the U.S. Treasury Department and Constantine Yannelis of the economics department at Stanford University wrote of their findings: “Most of the increase in default is associated with the rise in the number of borrowers at for-profit schools and, to a lesser extent, 2-year institutions and certain other non-selective institutions, whose students historically composed only a small share of borrowers. These non-traditional borrowers were drawn from lower-income families, attended institutions with relatively weak educational outcomes, and experienced poor labor market outcomes after leaving school.”

They added: “In contrast, default rates among borrowers attending most 4-year public and non-profit private institutions and graduate borrowers — borrowers who represent the vast majority of the federal loan portfolio — have remained low, despite the severe recession and their relatively high loan balances. Their higher earnings, low rates of unemployment, and greater family resources appear to have enabled them to avoid adverse loan outcomes even during times of hardship.”

Public comment on the new proposed education department regulations is open until Aug. 1, and the final regulations are expected to be published by Nov. 1.

The changes by the education department directed at for-profit schools were spurred in part by a whistle blower scandal involving the now-shuttered Corinthian Colleges, one of the nation's largest for-profit chains with 91 schools in 20 states. Students at Corinthian campuses had borrowed $3.6 billion in federal student loans.

A whistle blower in 2011 outed the schools for making allegedly fraudulent claims, including creating false employment data to show that graduates had found good jobs after completing degree programs.

The scrutiny, and the federal government’s crackdown against Corinthian, forced the school to file for Chapter 11 bankruptcy in May 2015, and a liquidation plan of its assets was approved in August.

In March, the education department announced that it would create a pathway for Corinthian students to receive student loan debt forgiveness.

Since then, the education department has offered loan forgiveness to more than 8,800 students at a cost of $132 million, and it continues to review more claim applications from former students.

Student loan debt hit $1.23 trillion in 2016 with 43 million borrowers nationwide and an average loan amount of about $37,000. Of those current debt-holders, 3.3 million were in default.