Student Loan Borrowers May Get Relief From For-Profit Colleges

The U.S. Department of Education has signaled it wants to be more aggressive in policing for-profit colleges by proposing rules that would make it easier to cut off funding to low-performing schools and, in some cases, force colleges to help borrowers who are stuck with large debts and low earnings. The proposal is part of the rulemaking process for how the department determines whether a school prepares students for “gainful employment.” If a school fails to do so, it could lose access to federal student loans, which make up nearly all the revenue at some for-profits. Some schools could be forced out of business.

About three months ago, the Department of Education proposed measuring gainful employment with two calculations that compare what graduates earn, relative to their student loan debt. But consumer advocates pointed out that the metric doesn’t take into account the loans incurred by students who drop out of the program and are stuck with debts and no degree.

A fresh proposal released on Friday by the Education Department added two measures of a school’s performance that look at how well students are paying back loans. One is known as the “program cohort default rate,” which calculates the percentage of students who fall behind on their loans within three years. The other looks at the loans taken out by students in a program to see if, on aggregate, they’re making at least the required interest payments. Both proposed measures include all borrowers, whether they’ve graduated or dropped out.

As the New America Foundation reports, the proposal has an additional part that is “by far the largest change:” A college failing the tests will need to pay back some borrower debt. The foundation offers an example of how a school would have to pay to bring borrowers’ debt payments down to 8 percent of their income: “If the current debt-to-earnings rate was 15 percent because average annual debt payments were $3,000 and average annual earnings were $20,000, then the school would have to provide funds to get the average debt payment down to $1,600.”

The proposals are part of a formal process to try to reach an agreement among the department and 14 designated negotiators (PDF) from the for-profit industry, as well as public schools, private colleges, and student groups. If negotiators fail to reach consensus, which, as Inside Higher Ed points out, is highly likely, the Department of Education can still issue regulations on its own. The new, stricter proposal indicates that if it comes to that, the department won’t go easy on for-profits, whose only recourse would be to sue the government.

    Before it's here, it's on the Bloomberg Terminal.