Closing GE Loopholes: The Case for a Repayment Rate

As the Department of Education works on a final rule to stop federal funding for career education programs that over-promise and under-deliver, it needs to close loopholes to prevent unscrupulous colleges from gaming the system.

Under the draft regulation, career education programs would be judged by two different tests: how the debt of their graduates compares to later earnings, and how many of the programs’ borrowers default on their loans.  Programs that consistently exceed allowable thresholds of debt-to-earnings or rates of default would lose eligibility for federal aid.  While many in the for-profit college industry complain that the tests are too stringent, the data show the exact opposite and that the rule needs to be strengthened.

Exhibit A for a tougher rule is the fact that 20 percent of the 114 parasitic career education programs – those where more students default than graduate – would pass the proposed tests. And exhibit B would appear to be Education America Inc.’s Remington College, a formerly for-profit chain that began operating as a nonprofit in 2011.

Data released by the Department in conjunction with the rulemaking show three large certificate programs that have a collective repayment rate of 12 percent – meaning only 12 percent of borrowers are paying down their debt. The three are large medical/clinical assistant certificate programs at what appear to be Remington’s Texas, Ohio and Alabama campuses. (Some of the data files released by the Department do not include college names so only the Department can confirm which college’s programs these are.  However, looking across multiple data files, including a file with college names, strongly suggests these three low-repayment programs are the Remington programs.)

To make matters worse, these three programs would not fail under the Department’s draft regulation– the one that industry complains about being too strict.  Despite the extremely low repayment rate, the aggregate cohort default rate for the three Remington programs is only 14 percent, far below the threshold of 30 percent. Such a low rate of borrower default from programs where hardly any borrowers are paying down their loans suggests the college may be manipulating their default rates by putting former students in forbearance during the window when default rates are being measured – regardless of whether it is in the borrowers’ best interest to do so. In fact, a Remington College executive said as much in 2009, noting that “we’ve known all along what [the Department] finally figured out,” that borrowers receiving forbearance and deferment were later defaulting on their loans once it stopped tracking defaults after two years. The Department then changed its default monitoring to a broader three-year metric. “They [the Department] decided we were getting off too easy,” the Remington executive noted. (Note that colleges can and do manipulate three-year default rates, but it takes more work to do so than for two-year rates.)

Programs where most students borrow and the vast majority of borrowers cannot repay their loans should not keep enrolling students receiving federal aid. The Department could close this loophole in the gainful employment rule by instituting a repayment rate in addition to the other tests. It must also prohibit unscrupulous schools from manipulating their program default rates or their repayments rates by making small payments on behalf of former students.

Read more about these issues and recommendations in our comments on the Department’s draft gainful employment rule. -Debbie Cochrane

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