Arbitrary Research Standards for For-profit Colleges

The companies that own America’s for-profit colleges have objected to the Obama administration’s Gainful Employment rules almost since the administration first proposed them. The companies recently sued to prevent the Department of Education from issuing the rules. They finally got a decision they like. It was, at least from the sake of reason and fair play, a pretty strange decision.

Gainful employment specifies that in order to continue to receive federal funding America’s vocational schools must make sure that at least 35 percent of former students are paying down their loans, former students must not have to pay more than 30 percent of their discretionary income on loan payments, and former students must not spend more than 12 percent of their total income on loan payments.

According to an article by Douglas Belkin in the Wall Street Journal:

Leaders of for-profit colleges are applauding a judge’s ruling overturning a main component of federal regulations that would have penalized the schools for graduating students with substantial debt and little chance of getting a job in their field.

Judge Rudolph Contreras, of the U.S. District Court for the District of Columbia, said the debt measures “lacked a reasoned basis” and called them “arbitrary and capricious.”

While Belkin judged that the department did certainly have the authority to regulate the industry to prevent fraud and help students make good decisions, he said the 35 percent rule was arbitrary.

But just the 35 percent rule. The other regulations were fine. Kevin Carey explains the basic decision over at the Chronicle of Higher Education:

Where the Department fell short, according to the judge, was in justifying one prong of the three-prong test used to evaluate job-focused higher education programs. Under the rules, programs are evaluated on three measures: a debt-to-earning ratio (that is, how big your loans are compared to how much money you’re making), a debt-to-discretionary-earnings ratio, and a loan repayment rate. The first two measures were valid, he said, because the department had presented research backing up the specific thresholds they chose. The 35 percent repayment-rate threshold, by contrast, was essentially chosen as a number that would land on some Goldilocks middle ground between identifying too many and too few programs. This is arbitrary, according to the judge, and since the three measures work together in determining eligibility for financial aid, the whole regulatory apparatus is suspended.

Well of course it’s arbitrary. That’s because it’s the result of compromise. It is, however, a perfectly reasonable figure. What research could indicate the precise percent of graduates that ought to be paying down their loans in order for the school to be any good? Was 35 percent too high? If anything it looks rather too generous to for-profits.

Given the judge’s opinion about the 35 percent measure, the Department of Education will not be able to implement the punitive provisions of the Gainful Employment rule. That will, at least for the time being, allow America’s for-profit colleges to continue to take advantage of federal student aid without regard to the debt levels and repayment rates of their former students.

There is, interestingly enough, extensive research to indicate that that situation is very bad for the financial health of students attending for-profit schools.

Apparently that research isn’t quite so important to Contreras.

Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer