Last month, the Obama administration announced a regulation that will require colleges and universities to show that their graduates are marketable and successful in order to qualify for taxpayer-funded federal student aid programs.
The new rule, which will take effect in July 2015, stipulates that a “typical graduate’s [estimated annual loan payment must not] exceed 20 percent of his or her discretionary income or 8 percent of his or her total earnings.” Otherwise, the program will become ineligible for federal funding and won’t be able to accept students who use Pell Grants to fund their tuition.
In theory, the regulation will crack down on programs whose graduates wind up drowning in student loan debt. The proposal is aimed in particular at regulating for-profit institutions, which have recently become a dominant force in the world of higher education but which are accused of making money on the backs of low-income students.
The University of Phoenix, for example, owned by Apollo Education Group, enrolled 319,700 students in 2013, amassing $1.1 billion in revenue. Like other businesses that run for-profit universities, Apollo Education Group has a vested interest in increasing its revenue because it caters to stock market shareholders.
While for-profit colleges claim to act in the best interest of their students, there clearly exists a conflict of interest between their mission to educate and their mission to profit. Market-driven pressure to increase revenue would seem to incentivize maximizing tuition rates and minimizing educational expenditures. Indeed, multiple sources indicate that graduates of for-profit schools face significantly higher unemployment rates and student debt than graduates of public colleges and not-for-profit universities.
According to the Department of Education, “attending a two-year for-profit institution costs a student four times as much as attending a community college.”
And because more than 80 percent of for-profit students borrow money to pay for school, for-profit students account for 44 percent of federal student loan defaults. Yet, disturbingly, for-profit college students comprise only 11 percent of the higher education population.
In a 2011 study published by the National Bureau of Economic Research, three Harvard faculty members corroborate these statistics, finding that “for-profit students end up with higher unemployment and ‘idleness’ rates and lower earnings six years after entering programs than do comparable students from other schools, and that they have far greater student debt burdens and default rates on their student loans.”
Furthermore, an investigation conducted by the Government Accountability Office in 2010 suggests that for-profit colleges use deceptive, manipulative recruiting practices to attract students. The GAO sent undercover applicants to 15 for-profit colleges, discovering that admissions representatives at all 15 schools provided unclear, incomplete or exaggerated information about their program’s duration and costs. At four of the colleges, applicants were blatantly encouraged to falsify financial documents in order to become eligible for financial aid. To be clear, this constitutes felony fraud.
The university system in the U.S. is rife with financial problems, but the solution to soaring tuition rates and a poor job market is not for-profit education. Leaving students at the mercy of the private sector exposes them to huge expenses that yield little benefit.
President Barack Obama’s decision to tie federal funding to post-graduation success may not be the ideal fix for the for-profit college problem. The president is attempting surgery with a machete, and if it turns out that his new policy does more damage to not-for-profit schools than the targeted for-profit ones, then it will need to be altered.
But the administration’s proposed regulation represents a necessary first step in ensuring that postsecondary institutions base their decisions around a commitment to education — not the stock market.
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Elizabeth Hannah is a neuroscience and cognitive sciences sophomore. Follow her on Twitter.
