College & Workforce Readiness

New Regulation Limits Debt for Graduates of For-Profit Colleges

By Caralee J. Adams — October 30, 2014 2 min read
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After years of debate over how to regulate career-training programs, the U.S. Department of Education on Oct. 30 issued “gainful employment” rules that will limit how much debt students can take on if colleges want to receive federal funding.

To qualify for federal student aid, the new standards require that most for-profit programs and occupational certificate programs at private nonprofit and public institutions prepare students for “gainful employment in a recognized occupation.” A program must show that the estimated annual loan payment of a typical graduate does not exceed 20 percent of his or her discretionary income or 8 percent of total earnings.

The Education Department projects about 1,400 programs serving 840,000 students won’t meet the new benchmark. Nearly 99 percent of these programs are offered by for-profit schools.

Institutions also will have to provide prospective students with information about their programs, such as what their former students are earning, their success at graduating, and the amount of debt they accumulated.

The for-profit sector has been criticized for luring more students into debt, with about 80 percent borrowing to attend compared to students at public institutions where less than half do. And most for-profit colleges charge higher tuition — four times more than community colleges for an associate degree and 20 percent more than state universities for comparable bachelor’s degrees.

Students often are mired in debt with no degree to show for their investment. The graduate rates at four-year, for-profit colleges are 23 percent, compared to 53 percent at nonprofit colleges and 33 percent at public institutions, according to the National Center for Education Statistics.

In response to public feedback, the government did modify the regulations that were proposed in March by removing the program cohort default rate as an accountability metric. Critics say by focusing only on the debt of graduates, the final regulations overlook the debt burdens of those who drop out.

The Institute for College Access and Success called the final rule “inadequate” in a statement released Thursday. “The final gainful employment regulation does not do enough to stop the fleecing of students and taxpayers,” according to the press release. “In particular, the final regulation lets programs where most students borrow but few graduate keep using taxpayer dollars to bury students in debt they can’t repay, so long as they limit the debt of the few students who complete. “

The institute joined more than 50 student and consumer groups to urge the administration to strengthen the regulations this spring.

The department maintains the regulations build on momentum toward increased accountability in higher education.

The regulations announced Thursday will become effective on July 1, 2015

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A version of this news article first appeared in the College Bound blog.