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Editorial: Crackdown overdue on for-profit colleges

Sat., Nov. 8, 2014

The Democrats took another midterm thumping Tuesday largely because the administration of President Obama has suffered repeated episodes of bureaucratic breakdowns, or worse: from the Internal Revenue Service, the Veterans Administration, the Ebola bungling; the list goes on.

Though not as headline-grabbing, the Department of Education’s repeated efforts to rein in abuses by for-profit colleges can surely be characterized as managerial illiteracy.

The industry – and that’s what it is – should be an easy target. The default rate on loans to students enrolled in two-year programs is twice that of public community colleges, and triple that for four-year programs. Almost one-half of all federal student loan defaults are attributable to students at for-profit schools, who may have agreed to interest rates as high as 16 percent.

Taxpayers get stuck with the unpaid balances, and the students get smeared with messy credit reports.

The administration has tried since 2009 to get the problems corrected. Its first attempt at regulation was tossed out of court in 2012, but the pressure has increased in the last year.

In a lawsuit filed last spring, the Consumer Financial Protection Bureau sued ITT Educational Services Inc. for encouraging students to accept those loan terms despite knowing 64 percent of them would go bad.

Corinthian Colleges, another major industry player, closed in June in response to federal and state complaints about its recruiting and loan practices.

Simultaneously, the Department of Education was proposing regulations that would have cut off federal loans to schools – public and for-profit alike – that have too many students not making loan payments.

Now, the department has come up with another proposal that determines how well colleges are performing for their students by tying participation in federal loan programs to the percent of graduate income consumed by loan repayments.

For example, loan payments cannot exceed 8 percent of gross income, or 20 percent of discretionary income. In a major oversight, the rule does not include students who did not graduate but who nevertheless have loans to repay.

The industry has sued to block implementation of those rules. The administration is running out of time, if not ideas.

With the changing of the guard in the U.S. Senate, the chairmanship of the Health, Education, Labor and Pensions Committee will likely pass from vocal industry critic Tom Harkin of Iowa, who is retiring, to the friendly Lamar Alexander of Tennessee. The new rules are scheduled to go into effect July 1. That will give the industry, which has plenty of lobbyists and money, time to force the administration to back off, if the courts haven’t done so first.

Alexander already has issued a statement criticizing the new rules.

The better path for the administration might be to focus on consumer-protection lawsuits, but the new Congress also will be hostile to much of anything that attacks businesses, no matter how blatant the exploitation.

It may fall to state attorneys general to finish the department’s incomplete work.