Strong Hand of Regulation Protects Students

Lawmakers charged with writing a new Higher Education Act (HEA) face a dilemma. Innovation in the higher-ed marketplace is badly needed to improve student learning and break the relentless cycle of increasing cost that puts college out of reach for many families. But innovation can also create new opportunities for bad actors to exploit students and taxpayers.

The conversation about managing that tension should start with the lessons of the Obama administration, which tried to create consumer protections for vulnerable college students and was proven right about everything that matters most.

The Obama efforts began during the earliest days of the administration and continued until the final hours before Donald Trump’s inauguration. Under Obama, the U.S. Department of Education (ED) created new regulations interpreting the long-established “gainful employment” clause of the federal Higher Education Act, which requires job-preparation programs to succeed in preparing people for jobs in order to receive federal financial aid.

Recognizing that it was far beyond the capacity or proper role of the federal government to directly assess tens of thousands of individual programs, the department chose to rely instead on evidence from the labor market to gauge quality. Rather than measuring inputs and processes, the regulations focused exclusively on student outcomes. If too many graduates of a given program couldn’t make enough money to pay back their loans—not just in one year, but for several in a row—the rules assumed that the job preparation had fallen short, the tuition was too high, or both. Federal aid would be cut off. This was, among other things, a straightforward matter of sound lending policy, since the federal government makes or guarantees the large majority of all student loans.

Most of the programs that had bad debt-to-earnings ratios were run by for-profit colleges. The industry immediately cried foul at the new rules. Millions of dollars were spent on lobbyists in Washington. Lawsuits were filed and fought. The rules were torn up and laboriously revised. Bills were introduced in Congress to prohibit ED from ever so regulating again. Throughout years of conflict, industry representatives insisted that the gainful-employment regulations were “arbitrary,” “biased,” “a bad-faith attempt to cut off access to education,” “ideological,” “irrational,” “unlawful,” and so forth.

But real-world events proved them wrong.

When the rules were first proposed, ED released estimates of how programs would eventually be rated. The regulations applied to for-profit colleges as well as thousands of job-focused programs at community colleges and other public and nonprofit institutions.

Not all colleges fared equally in this preview from ED. Many failing programs were clustered in a small group of publicly traded corporations, including Corinthian Colleges, the Career Education Corporation, the Education Management Corporation, and ITT Tech. Other well-known for-profits, like the University of Phoenix, were relatively unscathed.

Over the next half decade, while the gainful-employment regulations were held up in court, the for-profit sector was beset by a series of scandals, failures, and bankruptcies. Many of them were concentrated among the same group of institutions—including Corinthian Colleges, the Career Education Corporation, the Education Management Corporation, and ITT Tech. The University of Phoenix and others remained open for business.

In other words, the programs that the Obama higher-education accountability system identified as very bad were, in fact, just that. The process revealed a high degree of correlation between educational incompetence, financial mismanagement, and fraud.

To be clear, the lesson here is not that the free market took care of the problem. The very bad programs only persisted as long as they did because they were able to gull naive consumers and stay afloat on a sea of taxpayer dollars. The industry’s anti-accountability obstruction resulted in hundreds of thousands of vulnerable students wasting years of their lives while accumulating unmanageable debt that the Trump administration now refuses to write off. Billions of additional public dollars were squandered.

In fairness, it is a challenge for colleges to gather accurate information about how much their alumni earn. Only the federal government can systematically amass that information, by matching data from its student financial-aid system with IRS income records. Once the final list of failing programs was released, most colleges didn’t try to reform them in order to prevent eventual sanctions. They just shut the programs down.

In other words, the regulations worked just as intended. The Department of Education, as the steward of taxpayer dollars and protector of consumer interests, applied a simple, transparent, common-sense test of quality, using unique federal data. Individual colleges determined for themselves how to respond, free from advice or interference by federal bureaucrats. If the gainful-employment standards are kept in place, investors will become wary of pumping money into shoddy, marketing-driven programs, fearing that the funding spigot will be shut off before they reap their profits.

What lessons can we learn from the experience of the last nine years? And how should that wisdom be applied to the reauthorization of the Higher Education Act?

To start, the old, pre-Obama higher-education accountability system, which relied on accreditation as a guarantee of quality, will not suffice. Every one of the failing, bankrupt for-profits that have scarred the collegiate landscape over the last decade remained accredited until the day they shut their doors. Peer review through the accreditation process may be a good way to support continuous improvement. It is a terrible way to prevent fraud. The higher-education market runs largely on federal subsidies in the form of grants and loans to students—many of them naive consumers. Absent the strong hand of government regulation, we have a recipe for large-scale exploitation.

And while the problem of bad programs is concentrated among for-profit colleges, it is not exclusive to them. It turns out that even Harvard University was running a small program in the performing arts with an alarming debt-to-earnings ratio. Senate Committee on Health, Education, Labor, and Pensions (HELP) chairman Lamar Alexander’s staff recently released a report calling this “a telling example of how [the gainful-employment] rule has had unintended results.” Not so. What the Harvard example tells us is that well-designed accountability systems don’t exclude exalted institutions. Once Harvard was notified of the troubling program results, it suspended enrollment so it could revamp its approach to student aid. This is how accountability systems are supposed to work.

The limitations of the statutory authority granted by the gainful-employment language meant that ED couldn’t regulate public and nonprofit programs that aren’t explicitly job-focused. But that’s not an argument against accountability. It’s an argument for expanding accountability to include programs at all colleges and universities.

Like any other industry trying to protect a sweet combination of massive public subsidies and minuscule public obligations, colleges and universities like to argue that they’re burdened by too much paperwork, bureaucracy, and compliance. There is no credible evidence to support this claim. Meanwhile, the industry’s defenders in Congress are trying to hobble ED’s ability to gather baseline information about which colleges and programs are helping students learn, graduate, and pay back loans. Displaying the disregard for empiricism, public interest, and common sense that we have come to expect from the Trump administration, education secretary Betsy DeVos is actively working to tear down the Obama-era accountability system.

The Republican majority in the House of Representatives has introduced a new version of the Higher Education Act (Promoting Real Opportunity, Success, and Prosperity through Education Reform, or PROSPER) that would eliminate the gainful-employment provision and not replace it with any comparably strong regulations. It would also ax the “90/10” rule, which currently requires colleges to raise a minimum of 10 percent of their revenues from sources other than federal financial aid and thereby uses market outcomes as a proxy for quality.

Eliminating these provisions weakens the foundation of consumer protection on which innovation-promoting policies must rest. At New America, we have long championed ideas like competency-based education and other approaches that move past traditional, “seat time” measures of learning. I devoted an entire book, The End of College, to exploring how radical new higher-education models can upend the status quo. But the promise of future technology-driven innovation can’t blind us to the present-day risk of unscrupulous actors exploiting new rules to fleece the system.

The history of the gainful-employment regulation shows that it’s possible to create a broad, outcomes-driven accountability system that is agnostic toward the education model an institution uses—and thus, is hospitable to innovation—while protecting vulnerable consumers from predation. Congress should aggressively work to create room for many new kinds of college education while ensuring that every college, new or old, traditional or yet-to-be-invented, is held accountable for results.

This is part of the forum, “Rethinking the Rules on Federal Higher-Ed Spending.” For an alternate take, see “Change the Rules to Unleash Innovation,” by Michael B. Horn and Alana Dunagan.

This article appeared in the Fall 2018 issue of Education Next. Suggested citation format:

Horn, M.B., Dunagan, A., and Carey, K. (2018). Rethinking the Rules on Federal Higher-Ed Spending: How can congress spur innovation while clamping down on fraud? Education Next, 18(4), 50-56.

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