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Blog Post · July 27, 2017

Federal Policy Shift on Private For-Profit Schools

The US Department of Education is moving toward changing two regulations designed to protect students at private for-profit institutions. The regulations were revised or instituted by the Obama administration in response to allegations of fraud and predatory practices, as well as low graduation rates and high levels of student debt. Secretary Betsy DeVos says they are burdensome for institutions.

The regulations cover more than 250 private for-profit institutions in California; they affect about 245,000 current students and tens of thousands of former students.

DeVos is establishing rulemaking committees to review both regulations:

  • The Borrower Defense to Repayment (BDR) allows victims of misleading and predatory practices to apply for federal loan forgiveness. California attorney general Xavier Becerra says that about 38,000 Californians who took out loans to attend Corinthian Colleges (which shut down in 2015) are eligible to file claims. DeVos stated that approved BDR claims will be paid and pending ones will be processed while the regulation is under review. However, it’s unclear if students can still apply for loan forgiveness.
  • The Gainful Employment (GE) regulation is designed to help students avoid low-performing schools. It requires institutions to provide students with information on graduation rates, average earnings of graduates, and average federal student loan debt. The most important aspect of the regulation is the federal student aid qualification component, which stipulates that loan payments for graduates of postsecondary programs should not exceed 8% of annual earnings or 20% of discretionary income. Programs that do not meet these standards risk losing the ability to participate in federal student aid programs. According to Federal Student Aid data, in 2015 only 58% of programs at Californian for-profit institutions met the 8% benchmark, compared to 97% of programs at public and private not-for-profit institutions. The share of for-profits passing the discretionary income test is even lower, at 34% (public and not-for-profit schools have a passing rate of 82%). It is unclear if the GE regulations will be enforced while the committee reviews the regulation over the next two years.

While the federal government is taking steps to pull back on the regulation of for-profit institutions, California is moving in the opposite direction. In order for students at higher education institutions to qualify for Cal Grants, the institutions must meet minimum standards for graduation and loan default rates. In 2014, 137 institutions—almost all of them private for-profits—failed to meet California’s standards. In 2017, however, only 10 failed, which suggests that the policy might be working. Furthermore, California has joined 17 other states in suing DeVos over her decision.

As the Department of Education reviews these regulations, it should evaluate the effect the changes could have on student debt and loan default rates. In the meantime, keeping the current regulations in place would protect students from low-performing schools and help them avoid programs that may lead to high levels of debt and low-paying jobs.

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