Government Threatens To Cut Off For-Profit Colleges Unless Their Students Start Getting Jobs

Education Secretary Arne Duncan with President Obama CREDIT: AP PHOTO/HARAZ N. GHANBARI
Education Secretary Arne Duncan with President Obama CREDIT: AP PHOTO/HARAZ N. GHANBARI

The Department of Education will release long-awaited rules on Thursday that could cut many predatory for-profit colleges off from federal loan dollars in the coming years unless their graduates see significant improvement in their job prospects.

The so-called “gainful employment” rule has been in the works for years, drawing fierce lobbying from the industry and angry rhetoric from its supporters in Congress. The rule has been softened from previous versions and leaves the problem of high failure rates at the schools unaddressed, industry critics told the Washington Post.


The rules target schools that turn out students who earn too little to justify the cost their school charged. According to an administration fact sheet on the rule, any vocational training program whose graduates persistently face annual loan payments that are larger than 12 percent of their annual earnings and 30 percent of their discretionary income will risk being cut off from the federal money that for-profit schools rely upon. Schools may also be cut off if graduates face payments above 8 percent of annual income or 20 percent of discretionary income for four consecutive years.

There are currently 840,000 students enrolled in 1,400 separate programs that fall short of the performance required by the new rules, according to Secretary of Education Arne Duncan, with 99 percent of those programs offered by for-profit schools. The numbers are down from a previous draft of the rules that were expected to hit 1,900 programs and a million students, according to Inside Higher Ed, but up from the original gainful employment rule issued in 2010.

Many for-profit schools get 90 cents of every dollar of their revenues from taxpayer-funded student loans. That taxpayer money is being spent inefficiently: a two-year degree that costs $8,300 on average from a community college will cost $35,000 at the average for-profit school, according to a Senate report. The schools commit far more resources to sales than to the classroom, spending a billion dollars more per year on recruiting than on educating students.

Those recruits drop out at a far higher rate, but since their loan dollars have already transferred to the for-profit company that runs the school, the dropouts and defaults don’t interfere with the company’s profits. Many for-profit education companies pay their executives based on overall profitability, meaning that company heads’ incentives are aligned with recruiting rather than educational achievement.


Despite charging far higher prices than traditional alternatives, for-profits appear to provide far lower value to their customers. Applicants with for-profit degrees have no better luck getting a job interview than people with no college education at all, according to a 2013 study. When they do find work, for-profit graduates earn about $2,000 less per year than their counterparts who got a different kind of education, according to a 2011 study. Those statistics are part of the reason that many for-profit schools have loan default rates that are higher than their graduation rates.

The median debt load for a for-profit graduate is $13,000 higher than for people who got their degrees from public schools, and for-profit students are more than four times as likely as community college kids to take on student loan debt to pay for school.

The finalized gainful employment rule is the most recent formal step in a gradual tightening of federal oversight at for-profit schools. Earlier this summer, the Department of Education effectively put Corinthian Colleges out of business by throttling the company’s access to federal funds due to Corinthian’s failure to cooperate with a federal inquiry into its business model. As one of the largest companies in the for-profit sector, Corinthian’s bankruptcy was big news in the industry. The government is helping the company sell off its campuses to other for-profit education companies rather than canceling students’ debts, however, leaving the ultimate fate of Corinthian students murky.

More recently, the Consumer Financial Protection Bureau sued the company to overturn hundreds of millions of dollars in student loan debts that it says the company originated illegally on behalf of students who shouldn’t have owed the money. And a group of organizers with Strike Debt bought and canceled over $4 million in student loan debt owed by Corinthian students at a cost of just $100,000, in hopes of launching a collective movement to resist illegitimate educational debt.