Editorial: Rein in loan excesses at for-profit schools

Published June 20 2013
Updated June 20 2013

If at first government doesn't succeed at reining in exploitative for-profit colleges, it must try again. Renewed efforts by the Obama administration to crack down on exploitative for-profit programs are good for unsuspecting students and taxpayers. To ensure the health of the federal financial aid system for future generations, the government must find a way to prevent bad actors from getting a share.

The for-profit sector is a fast-growing subset of higher education, where steep tuitions can be heavily subsidized through federal student aid programs but default rates are far higher than at nonprofit private or public institutions. Not all for-profit colleges are suspect. But a 2012 U.S. Senate investigation found that many deployed aggressive recruitment tactics, preying on the poor and ill-prepared who rely on federal student aid to attend. Some compare the situation to the subprime mortgage crisis that saw unprepared buyers take out loans they couldn't afford.

For-profit students make up about 13 percent of the nation's college enrollment, but they gobble up about a quarter of all federal student aid each year. More than half of the sector's students withdraw by the end of two years. Those who do graduate are often buried by debt and qualified only for jobs that will never enable them to repay their loans. The result: For-profit students account for about 47 percent of loan defaults. Meanwhile, college executives and shareholders pocket huge sums. As much as 90 percent of a school's revenue can come from federal student aid.

Two years ago, President Barack Obama tried to rein in for-profit colleges. Proposed Education Department rules would have blocked federal student aid to career training programs whose graduates showed poor debt-to-income ratios and loan repayment rates. But a judge last year struck down a key test of the so-called "gainful employment" rules, saying regulators had established an arbitrary debt repayment ratio that a college's graduates must meet. The judge did confirm the department had the authority to regulate exploitative programs.

Now the Obama administration's challenge is to find a defensible way to differentiate exploitative for-profit colleges from their legitimate competitors. In April, the Education Department announced it is seeking input on how to do that. The entire higher education industry should engage. A strong federal financial aid system is one in which needy students get the help they need to successfully obtain a valuable credential and taxpayers are repaid, too.