New Federal Rules Aimed at For-Profit School Rip-Offs

Yesterday, June 2, 2011, the Department of Education released final rules aimed at for-profit schools — requiring them to better train their students for gainful employment. Under the new rules, if schools don’t meet certain standards for their graduates, students will not be able to get federally backed student loans to attend the school.

The Background: For-Profit School Rip-Offs Hurt Students and Taxpayers

For years (decades really), many for-profit schools have enticed low-income students to sign up for large amounts of student loans  with the promise of  getting a good job when they graduate. Sadly, the instruction offered at some of these schools is of such poor quality that students graduate with no chance of getting a job in their field of study. While those attending for-profit schools represent only 12% of all students receiving higher education, they represent a whopping 46% of all students with defaulted student loans.

The end result: Huge profits for the  schools, huge debts with no chance of increased income for the students, and lost money to the taxpayers (because of all the loan defaults).

The New Rules: Preparing Students for Gainful Employment

The new rules will require schools to demonstrate that a certain percentage of their graduates have received training adequate to be gainfully employed in a recognized occupation. The rules will apply to nonprofit and for-profit schools, although the Department of Education predicts that only 1% of nonprofit institutions will be impacted by the regulations.

Under the regulations, schools must meet one of the following three tests:

  • at least 35% of former students are repaying their loans (which means reducing their loan balance by at least $1)
  • the estimated total annual loan payment of a typical graduate does not exceed 30% of the graduate’s discretionary income, or
  • the estimated total annual loan payment of a typical graduate does not exceed 12% of the graduate’s total earnings.

The regulations will not go into effect until July 1, 2012.  Schools will get “three strikes” (meaning, missing the above metrics) before they are kicked out of the federal student loan borrowing programs.

I think the more important regulations rolled out are those that will require schools to disclose to students: total program costs, loan repayment rates, and the debt-t0-income ratio for typical graduates, among other things.

Will the New Rules Make a Difference?

Quite frankly, that the bar has been set so low (do you really want to attend a school where only 35% of former students can repay $1 of their student loans?)  says a lot about how bad the scams are right now. So, yes, the new regulations will put a few of the worst schools out of business (the Department of Education estimates about 5%), and will force some schools to clean up their act, at least a little bit. But students still need to go into these for-profit schools with their eyes wide open. To that end, the regulations requiring schools to disclose some important facts about costs, loan repayment amounts, and how much their graduates earn will hopefully do more to protect unsuspecting students than do the “three strikes” rules. Maybe once students see the numbers, they’ll opt for community college or other nonprofit learning institutions.

The effectiveness of these new disclosure requirements will depend on how they are presented to students, and how much “policing” the Department of Education is able to do.  In my experience, the scam trade schools are quite creative when it comes to “burying” the fine print, especially when the prospective students don’t speak English or have little education.

All in all, however, the regulations are a step in the right direction. At least the Obama administration, with these new rules, has called attention to the billion dollar for-profit school industry that often leaves students and taxpayers in the lurch.

To learn more about the new regulations, check out the Department of Education’s press release on the subject.