By Allie Grasgreen
On Wednesday, the Obama administration will begin choking off the financial lifeline of for-profit colleges whose graduates can’t find well-paying jobs — and the move is likely to accelerate a wave of shutdowns for an industry taking assaults from all sides.
Reining in the multibillion-dollar industry has been the administration’s goal for most of President Barack Obama’s term in office, fueled by complaints that for-profit colleges lure students with misleading promises, then saddle them with debts they can’t pay back despite their newly granted degrees. Its latest tool is the Education Department’s long-debated “gainful employment” rule, which requires colleges to track their graduates’ performance in the workforce and eventually will cut off funding for career training programs that fall short.
The rule — upheld by a court ruling last week and set to take effect Wednesday — will trigger the closure of 1,400 programs that together enroll 840,000 students, the department has estimated. Ninety-nine percent of those students attend for-profits.
The regulation is part of a broader series of crackdowns on the industry by agencies including the Consumer Financial Protection Bureau, the Federal Trade Commission and the Securities and Exchange Commission, along with investigations, lawsuits and fines from states and blistering criticism from Democrats like Sens. Elizabeth Warren and Dick Durbin. Some major college operators have begun closing or selling campuses under the onslaught.
Supporters call the regulatory moves long overdue. But the industry denounces them as a witch hunt.
“We’ve come to expect these unjust assaults,” said Gene Feichtner, president and chief operating officer of the huge for-profit chain ITT Technical Institute, which has been sued by CFPB, faces fraud charges from SEC and is under investigation by 16 state attorneys general. “Let there be no presumption here that we believe we’ll be treated fairly.”
For-profits blame the regulations and investigations for accelerating their financial decline — a turnaround from the way the industry blossomed under what the White House has described as looser restrictions implemented by the George W. Bush administration. (Sally Stroup, general counsel for the industry’s national trade group, worked for Bush’s education secretary after working for for-profit operator Apollo Education Group.)
Assaults are coming from all fronts. Last Wednesday, the Justice Department announced that the college operator Education Affiliates would pay $13 million to settle allegations it had falsified federal financial aid claims and misled Education Department officials by helping applicants obtain fake diplomas and then collecting federal financial aid dollars for those students.
For-profit colleges enroll just 11 percent of students nationally, yet account for 44 percent of federal student loan defaults, department officials often say.
Now-defunct Corinthian was once a giant in the for-profit college industry, before financial sanctions imposed by the Education Department essentially killed it. Three other major operators — DeVry Education Group, Career Education Corp. and Education Management Corp. — announced in the past month that they would either sell or shut down campuses, with some citing the upcoming gainful employment rule.
Critics and regulators say the colleges are so vulnerable only because of their own practices. The industry is plagued with student loan borrowing and default rates higher than other types of institutions, and graduates report worse career outcomes.
The gainful employment regulation applies to community colleges and public universities as well, but for-profit programs fare worst under the rule’s key evaluation metric, a debt-to-earnings ratio. The industry, which collected about $22 billion in taxpayer loans and Pell Grants in 2013, says it’s being unfairly targeted, punished by the government for enrolling high-risk students — first-generation, adult, low-income and the like — who are less likely to repay loans but need access to the flexible models that for-profits provide.
Reflecting on the recent closures, Education Undersecretary Ted Mitchell said: “I do think that’s a positive sign, and I think it’s a sign that the industry is taking outcomes seriously, just as we’re saying we’re going to take outcomes seriously.”
This is the Education Department’s second try at a rule, after the first attempt was upended in court.
For-profit colleges have taken some steps to change their practices, in part to push back against the legal and regulatory onslaught. Kaplan restructured or closed several programs. Colleges started offering trial enrollment periods. And some, like the largest operator, University of Phoenix, agreed to use the federal “Shopping Sheet” financial aid comparison tool.
“They’re responding — in what I think is an appropriate way — to limit programs that are underperforming,” Mitchell said. “Which is what we hope all institutions across the for-profit and the nonprofit sector would be doing.”
Enrollment at for-profit colleges grew from 4.6 percent of all undergraduates in 2000 to 10.3 percent of all undergraduates in 2012, according to a recent Woodstock Institute report. That growth coincided with the Bush administration Education Department’s creation of a dozen “safe harbors” letting colleges base recruiters’ salaries on their success in securing enrollments, circumventing measures passed by Congress in the early 1990s.