for-profit colleges

Earlier this week, the Department of Education announced a new process to resolve about 21,000 applications for borrower defense discharges, available to students whose schools have mistreated them in violation of state law. For some of these students, the resolution of their applications will lead to full student loan discharges and allow the students a fresh start. Other students, however, will receive partial discharges, meaning that their loan balances will be reduced but not eliminated. While the resolution of these claims is long overdue, we have both questions and concerns about how the amount of relief provided to each student is being determined.

The announcement explains a new approach for deciding whether students with valid claims will have their loans written off or only reduced. Students’ earnings will be compared against the average earnings of students from comparable programs that passed the gainful employment standard, a rule designed to ensure that career education programs are adequately preparing students for gainful employment in a recognized occupation. In effect, this approach would contrast what harmed students are earning against what they might have been earning had they attended a better program leading to the same credential in the same area, and discharge a proportion of their debt based on how their earnings compare to those of passing programs’ graduates. For example, “students whose current earnings are less than 50 percent of their peers from a passing gainful employment (GE) program will receive full relief.”

Even conceptually, this approach is highly problematic. A student lured into enrolling in and borrowing for a worthless program might see minimal to no relief if they were paying their bills by working in a completely unrelated job, earning minimum wage. This effectively punishes borrowers who manage to stay afloat despite being mistreated by their schools, akin to a “lemon law” that doesn’t require manufacturers to reimburse or replace cars if consumers can afford to buy a replacement car themselves.

Yet practical questions remain about how this process will work, and the answers may raise additional concerns.

First, how will the Department consider the borrower’s earnings, when calculating relief? The wording of the announcement seems to suggest that an individual student’s actual earnings would be used to determine the relief amount, but several news stories have indicated that the Department will instead consider the average earnings of graduates from the program the student had attended. But individual students may have different experiences, and many students will have incomes far lower than the program mean or median. This variation in students’ experiences is likely particularly common within gainful employment programs because the Department’s data sometimes combine multiple campuses.

Including only students who completed their program will likely overstate the earnings for all students who attended that program. Because noncompleters are likely to have lower earnings on average than the completers in the earnings data the Department is reportedly using to calculate relief, using completers’ earnings will drastically minimize the amount of relief being made available. This is an especially concerning issue for borrowers who attended Corinthian Colleges (a chain of for-profit schools known more commonly as Everest, Wyotech, and Heald) because a clear majority of Corinthian borrowers did not complete their programs. For example, College Scorecard data show that 61% of students borrowing federal loans to attend Corinthian schools left their programs without completing. 

 

The Majority of Students who borrowed to attend Corinthian schools never finished their program

 

Moreover, earnings data are not available for all programs. Most of the nearly 100,000 pending borrower defense claims come from former students of Corinthian Colleges, where the Department itself helped to document widespread, substantial misconduct of the sort that makes students eligible for loan discharges. In fact, the misconduct was so pronounced that the Department created an expedited borrower defense application process for students who had borrowed to attend over 700 Corinthian programs.  

The Corinthian Colleges schools that remain open were purchased by a nonprofit, Zenith Education Group, in 2015. This distinction between for-profit and nonprofit status is relevant because the gainful employment rule – data from which borrower defense discharge amounts will reportedly be pegged – applies to virtually all programs at for-profit colleges as well as certificate programs at public and nonprofit colleges. Despite the fact that Zenith agreed that the purchased schools would continue to comply with the gainful employment rule as a condition of the sale, the Department’s gainful employment data exclude virtually all degree programs from former Corinthian schools. As a result, there are no publicly available earnings data from these programs. Hundreds of the programs for which the Department had created an expedited borrower defense process were degree programs, and this week’s announcement is silent on how discharge amounts would be determined in cases where program-level earnings are unavailable.

If the Department’s process is intended to adjudicate borrower defense claims from mistreated students in a way that “makes them whole,” this approach misses the mark. It is also important to remember that even full loan discharges and refunds are still only partial relief for students who, in addition to having borrowed federal loans, may have used up eligibility for time-limited grants, taken out private loans that can’t be discharged, and invested their own time and money into their education. These are resources that students can’t get back. Figuring out ways to pinch pennies out of students’ federal loan discharges is ill-advised, and the Department’s plan for doing so is ill-conceived. 

 

 

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Beyond the fact that they’re almost all open-admission institutions, there are more differences than similarities between community colleges and for-profit colleges, including when it comes to student debt. New data released by the U.S. Department of Education in conjunction with the updated College Scorecard show just how different. Three comparisons are below.

  1. The vast majority of schools where debt problems are most severe are for-profit collegesInside Higher Ed’s recent analysis looked at schools where the majority of students borrows, and a minority of students is paying down their debt seven years into repayment. Our additional analysis found that, of the 257 schools that meet those criteria, 227 (88%) are for-profit colleges. Only two schools (fewer than 1%) are community colleges.
  1. Community college borrowers are much more likely to be paying down their debt. Three years after entering repayment, federal loan borrowers who attended community colleges were much more likely than for-profit college borrowers to have begun paying down their balance. Most strikingly, the available data on repayment rates by completion status show that borrowers who completed their studies at a for-profit college were about as likely to be paying down their loans as students who withdrew from a community college (53 and 51 percent, respectively). 
  1. Many more students at for-profit colleges are neither paying down their loans nor in default. While available default and repayment rates have some differences (most notably, default rates include graduate students and repayment rates do not), they are comparable enough to identify trends and outliers. Comparing default rates and repayment rates tells you how many students have avoided default but still aren’t faring well: perhaps they’re delinquent, in forbearance or deferment, or in a repayment plan where their balance is growing rather than shrinking. Some for-profit colleges have admitted to what the Department, in its documentation of the Scorecard data, described as “gaming behavior that may push students toward forbearance and deferments, meaning they stay out of default but don’t make progress on repaying their loans and may continue to accrue interest.”

    ​Across all schools, this missing middle group – those neither in default nor paying down their loans – composes on average about 21 percent of borrowers three years into repayment. But at 483 schools, 40 percent or more of borrowers are neither in default nor paying down principal. The vast majority of these schools (79%) is for-profit colleges, including Kaplan University and several Kaplan Colleges and Kaplan Career Institutes, which previously shared a parent company that hired private investigators to track down former students to put them in forbearance. It includes several campuses of Education Management Corporation-owned schools Argosy, Brown Mackie, and the Art Institutes. It includes Harris School of Business, Drake College of Business, and Westwood College. This missing middle group also makes up more than half of all borrowers at several Everest College campuses that remain open for business. While Everest schools are now under new corporate management, the former CEO had this to say about managing cohort default rates during a 2011 investor call: “Forbearance, as you well know, is a pretty easy, just a question you have to agree to it and you’re on your way [sic].”

    ​Forbearance abuse for the purpose of evading accountability is well documented in the for-profit college sector, but has not been documented at other types of institutions. Just 6% of the schools where 40 percent or more of borrowers are neither in default nor paying down their loans three years into repayment are community colleges. 

Any college with default and repayment problems of any scale should be focused on better enabling their students to repay their loans. But as the newly available data continue to underscore, for-profit colleges have by far the farthest to go.

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Yesterday, Corinthian Colleges abruptly closed its remaining 30 campuses in California, Arizona, Hawaii, New York, and Oregon, where 16,000 students were enrolled. While nothing can give these students back the time they spent at Corinthian, they deserve a fresh start.

The good news is that the Higher Education Act (HEA) provides for the discharge of students’ federal loans if a school closes before students finish their programs. In fact, the HEA says “the Secretary shall discharge” students’ loans, and the Education Department’s regulations specify that the Secretary will mail each borrower a discharge application and an explanation of the qualifications and procedures for obtaining a discharge.

The bad news is that the HEA does nothing similar to restore students’ eligibility for Pell Grants, which needy students can receive for no more than six academic years. Because the law doesn’t reset the clock on a student’s eligibility for Pell Grants when a school shuts down, low-income students may not be eligible for enough aid to complete a program anywhere else.

For example, the students enrolled in the pharmacy technician certificate program at Corinthian’s Everest College in West Los Angeles – which cost more than $11,000, and had a 25% job placement rate and a 35% student loan default rate – will be able to get their federal loans discharged, but they won’t get their Pell Grant eligibility restored to what it was before they enrolled at Everest. As a result, they may not have enough Pell Grant eligibility left to complete the much lower cost pharmacy tech program at the nearby community college. 

For the more than 12,000 Pell Grant recipients estimated to be enrolled at the Corinthian campuses that suddenly closed yesterday, this is an oversight needing swift correction.

How did Pell Grants get left out of the closed-school provisions? Prior to 2008, students could receive Pell Grants for as long as they were making satisfactory academic progress towards a degree or certificate. So if a school closed before a student could finish, the student didn’t need to worry about their Pell Grant eligibility running out. 

However, in 2008 Congress limited future Pell Grant eligibility to nine years.  Then, in 2011 Congress lowered this lifetime limit to six years and applied the new limit immediately and retroactively to all students, including those just a semester away from completing their degrees.

Unfortunately, Congress didn’t amend the HEA to restore students’ eligibility for Pell Grants when a school closes before they can finish. This was likely an oversight, not a conscious policy decision. As a result, the lowest income students at Corinthian campuses may not have enough Pell Grant eligibility left to complete a program at another school. 

It’s time to fix this harmful omission. In the last Congress, Representative Janice Hahn introduced the Protecting Students from Failing Institutions Act (HR 4860) to restore Pell Grant eligibility for students at campuses that close. We recommend going a step further: Pell Grant eligibility should be restored for any student who has their federal student loans discharged, either because their school closed or because of school fraud. Current and former Corinthian students deserve a true fresh start and the chance to get a meaningful degree or certificate at another school.  

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The release of the final gainful employment rule today is a step in the right direction, but the following examples of programs that meet the final standards make clear just how modest a step it is.

The draft rule released in March would have measured career education program outcomes in two ways. First, the debt burdens of program graduates who received federal aid would be compared to their later earnings. Second, students’ ability to repay their loans – including both graduates and noncompleters – would be measured through a program-level cohort default rate.

Based on the data released in conjunction with the draft rule, we identified 114 career education programs where more students default than graduate. In other words, these are programs where students receiving federal aid to attend these programs are more likely to find themselves unable to repay their debt than they are to complete the program. The particularly shocking part was that, under the draft rule, 20% of these programs passed the Department’s proposed tests, underscoring the need for the rule to be strengthened.

So, what does final rule, which eliminated the use of program-level cohort default rates, mean for those 114 programs that we called parasitic because of their consumption of resources to the detriment of students and taxpayers? It means that 15 more of them will pass the gainful employment tests (in addition to the 23 that passed the draft rule’s tests). Fully one-third (33%) of the 114 parasitic programs would now pass, giving schools no incentive to improve them.

Of the 15 newly passing programs, seven are at the University of Phoenix and include the following:

  • The associate’s degree in web page, digital/multimedia and information resources design, from which the almost 1,600 borrowers who entered repayment defaulted at a rate of 47%.
  • The associate’s degree in corrections and criminal justice, with a cohort default rate of 44% and where the number of defaulters exceeded the number of graduates by more than 3,000.
  • The associate’s degree in professional, technical, business, and scientific writing, where more than four times as many students default as graduate (316 students default vs. 70 students who complete).

For more information about the final gainful employment rule and what more should be done, see our statement here.

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In College, Inc., correspondent Martin Smith investigates the promise and explosive growth of the for-profit higher education industry. Through interviews with school executives, government officials, admissions counselors, former students and industry observers, this film explores the tension between the industry --which says it's helping an underserved student population obtain a quality education and marketable job skills -- and critics who charge the for-profits with churning out worthless degrees that leave students with a mountain of debt.

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