For-profit colleges have generally failed to provide students with the benefits higher education is supposed to produce. These colleges are different than public universities, which are government-owned, or private nonprofit universities, which reinvest excess revenue back into the school. For-profit colleges — also known as proprietary colleges — are privately-owned businesses that distribute profits to their shareholders. They maximize their profit by increasing revenue through tuition and decreasing costs, such as instructor wages, academic counseling, or classroom materials. Too many students take out large student loans to attend expensive for-profit colleges, only to receive low-quality instruction that leaves them unable to obtain well-paying jobs or repay their loans.
The federal government must take action to regulate for-profit colleges. Although state governments can regulate some aspects of the for-profit college industry, congressional action is required because proprietary schools are primarily financed through federal programs.
The problems of predatory for-profit colleges
In 2017, over 1.3 million students were enrolled in for-profit colleges. These students take out larger student loans, suffer worse employment outcomes, and have higher loan default rates than students enrolled in public or private nonprofit schools, even when controlling for characteristics like race, age, or income. Proprietary colleges engage in aggressive marketing and recruitment tactics that target veterans, students of color, and low-income students. A series of high-profile closures and lawsuits are revealing the extent to which many for-profit colleges may engage in deceptive business practices.
Several states have imposed regulations on the for-profit industry. Massachusetts requires for-profit schools to “clearly and conspicuously” post disclosures about completion rates, loan repayment rates, and more. Maryland recently passed a law requiring similar disclosures. California will soon begin collecting and publishing the student wage and debt information of proprietary colleges.
However, states’ efforts don’t address the root of the problem: for-profit colleges can finance almost all their business through federal funding, converted into tuition as student loans, while offering low-quality education. Many for-profit colleges receive 90 percent of their revenue from tuition, so they are funded almost entirely by students’ loans. In 2015, 27 percent of all for-profit colleges received more than 80 percent of their revenue through students’ federal education loans. In comparison, public and private nonprofit colleges receive only 27 percent and 39 percent of their revenue from tuition, respectively. For-profit colleges are unique in their reliance on tuition and, by extension, federal student loans. The states cannot solve this problem alone.
The federal financing of for-profit colleges
The federal student loan system establishes perverse incentives at for-profit colleges. A for-profit college can be a successful business without being a successful school.
When a student pays their tuition with a student loan, the Department of Education essentially writes a check to the college. The school pockets that loan as revenue. Then, the student must repay the Department of Education. If the student receives a subpar education from a for-profit college, they – not the school – are responsible for paying off the loan.
In 1992, Congress established a safeguard to prevent businesses from funneling federal money through students into their shareholders’ bank accounts: the “85/15 Rule.” This line in the Higher Education Act requires a for-profit college to claim federal student loans as only 85 percent or less of their total revenue; 15 percent of the revenue had to come from another source. The rule was modeled off a market mechanism from the GI Bill that helped ensure the quality of a school’s education. For-profit colleges were supposed to perform so well that private investors were willing to support a portion of the business. In 1998, Congress increased the tuition-based revenue ceiling to 90 percent, establishing the “90/10 Rule” that exists today.
Servicemember and veteran education benefits aren’t counted toward a school’s 90 percent cap. A for-profit school could obtain 90 percent of its revenue from federal student loans, ten percent of its revenue from GI Bill benefits, and still be compliant with federal law.
This structure encourages for-profit colleges to earn all their profit from federal student loans. Consequently, only the federal government can reform this system. The state laws which do exist protect students from abusive recruitment tactics, but don’t address the underlying financial structure of for-profit colleges.
Possible federal reforms
Two popular proposals for proprietary college reform require federal government action because they involve federal financing: closing the veteran loophole and reducing the 90 percent cap on revenue from federal programs.
Many academics, policymakers, and veterans’ groups advocate for closing the “loophole” that excludes military benefits from the “90/10 Rule” because it encourages for-profit schools to target servicemembers. In 2016, approximately one-third of GI Bill recipients attended proprietary colleges. For-profit colleges make up about ten percent of all institutions of higher education, but have received roughly . Since the federal government both enforces the “90/10 Rule” and manages servicemembers’ benefits, it is best suited to enact this reform.
Another possible reform is reducing the 90 percent revenue cap. There may be a correlation between a proprietary college’s ratio of federal funding and the quality of the education it provides. For-profit colleges with high percentages of federal loan revenue have worse outcomes than schools with lower ratios. When Congress implemented the “85/15 Rule,” the loan default rate among for-profit students fell from 65 percent in 1990 to 30 percent in 1998.
Reducing the “90/10 Rule” would require changing a single line in the Higher Education Act. The federal government is best-suited to amend this sentence, and the Department of Education already has the authority and expertise to enforce it. States are ill-equipped to enact these changes because they do not control federal loan programs.
Some are concerned these reforms would negatively impact students. If the “85/15 Rule” was enacted, one study estimates 13 percent of the for-profit schools open in 2015 would have been ineligible to continue receiving federal loans. Additionally, 24 percent of students were enrolled in for-profit colleges that would not have met the 90/10 requirement if the military benefits loophole had been closed in 2015. Shuttering these many for-profit schools would abruptly end the education of thousands of students.
These disadvantages of school closures, however, don’t outweigh the harms predatory schools can inflict indefinitely if they continue to have unfettered access to federal funding.
It is easier to mitigate the effects of school closures than it is to ameliorate the harms of predatory for-profit schools. If students are enrolled in a for-profit college when it closes, their loans may be forgiven through the closed school discharge process. This process, though complex and time-consuming, would still be preferable to the status quo: students obtaining large student loans and earning worthless degrees from fraudulent schools, with few opportunities for debt relief.
Conclusion
The federal government has an opportunity to protect vulnerable students by adjusting the financing it provides to for-profit colleges.
Federal financial reforms will not solve all the problems in for-profit colleges, or in higher education. Increased tuition rates across all sectors are forcing students to take on larger debts. Four years after graduation, black graduates owe student loans twice the size of white students’ debt. Low-income students have lower graduation rates than their higher-income classmates. Closing the military benefits loophole or returning to the “85/15 Rule” will not solve the inequities within for-profit colleges.
What these reforms can do is protect future students from the worst for-profit colleges. Enrollment in for-profit colleges has been slowly declining over the past few years. The peak occurred in 2008 and 2009, when the sector saw enrollment increase by 20 percent. If that dramatic increase was related to the Great Recession, then another economic downturn could result in a renewed increase in enrollment in proprietary schools. The federal government should regulate for-profit college financing today to prevent future abuses.
Photo by Gage Skidmore on Flickr
