Are You Gainfully Employed? Setting Standards for For-Profit Degrees

Reports & Briefs | September 16, 2010
Image of culinary students (Photo credit: NAIT via flickr/creative commons)

Education policy events in Washington, D.C., attract a familiar cast of characters: think tank representatives, members of organizations with eight-letter acronyms, and the occasional retired college professor. But an event at the New America Foundation this summer attracted a different crowd: organizations with names that ended in “markets,” “capital,” and “fund.” The questions from the audience weren’t about quality teaching or common curriculum standards; they were about income vs. earnings, access to federal databases, and student debt thresholds. Someone hearing just the audio feed might have easily mistaken the conference for the quarterly earnings call of a Fortune 500 corporation.

The subject of the event was for-profit higher education. Representatives from the financial sector had come to New America, a nonpartisan public policy institute, to hear a high-level Obama administration official talk about a regulatory controversy that could make them—or lose them—hundreds of millions of dollars. Just a few days before, the U.S. Department of Education had released a new proposal that would make it more difficult for for-profits to access billions of dollars in federal funds. At the center of the proposal is a rule called “gainful employment” that would penalize for-profit colleges and other vocational training programs for saddling students with more debt than they can pay back.

For-profits have grown by leaps and bounds in recent years, largely free of federal regulation. That freedom would be significantly curtailed if the gainful employment standard takes effect. Vocational training programs would be judged by the ratio of the debt that graduates assume relative to their current earnings and the rate at which they are able to repay it. If programs offered by for-profit colleges exceed certain thresholds on those measures, they risk losing eligibility for federal student aid. Given that many for-profit colleges receive close to 90 percent of their revenue from federal grants and loans, losing access to these dollars would be a death sentence.

With such high stakes, the proposed gainful employment standard has generated intense debate. While the owners of for-profits see a $29 billion industry that produces some of the best earnings ratios in the stock market, a group of well-funded short-sellers paints a picture of a fraudulent, over-leveraged industry that’s poised for a subprime mortgage–style collapse. The institutions argue that they serve a class of students excluded from traditional higher education and that they are crucial for meeting the Obama administration’s college completion goals. But many lawmakers worry that in fulfilling that mission, for-profits have relied too heavily on federal aid, forced students to borrow too much money, and produced degrees of questionable worth. Sen. Tom Harkin, the Iowa Democrat who chairs the Senate committee overseeing these schools, has warned that “even good actors in this industry are lured into the vortex of bad practices in order to compete and meet investors’ expectations.”

Critics of the gainful employment standard, meanwhile, have claimed the proposal “will eliminate quality programs while doing little or nothing to address the issue of excessive student debt.” Some have even gone so far as to say it “will attack our freedom and individual liberty to make decisions that have consequences.”

Yet despite all the noise and controversy, important questions have been left unanswered: Which institutions are most vulnerable to the proposed rules? What types of programs are most likely to be affected? This report tries to answer these questions, using publicly available data to present, for the first time, a picture of what effect the gainful employment proposal could have at more than 12,600 vocational programs at colleges and universities across the country. This includes more than 2,350 bachelor’s degree programs. ...