For-Profit Education Policy Trivia

by Daniel L. Bennett

Let's play a little game of education policy and research trivia. Read the below statements regarding the for-profit sector and try to guess when these statements were made.

Private career schools became a front-burner issue for postsecondary education policy about _______ (hint: timeframe)..., in terms of participation in federal programs and in broader discussions about consumer rights and abuses...The impetus...can be traced to one key indicator: rapid increases in the amounts defaulted by students participating in federally guaranteed student loan programs

The sudden interest in proprietary schools generated by the debate over default led to several subsequent policy discussions. One had to do with the level of debt appropriate for young people entering the labor market, another with the increasing proportion of overall federal funds for student assistance going to students in private career schools, and another with consumer rights and abuses related to admissions, advertising, and promises for employment

Now, you are probably familiar with the fact that the Obama Administration and the Department of Education are changing the cohort default rate rules to account for 3-year defaults in 2012, and that there have been discussions about tightening other regulations regarding the for-profit sector, such as the 90/10 rule and gainful employment. So it would be a great guess if you said that the above statements were made in 2009, but you would be way off because they were made during the 1980s and included in a paper by Lee and Merisotis (1990) that I recently came across.

That's right, we've been having the same policy discussion about student default rates and so-called consumer protections for around 25 years - in effect beating a dead horse. Despite subsequent regulations including establishing limits on CDRs to maintain Title IV eligibility, the 90-10 and gainful employment rules, laws requiring career schools to publish their job placement and graduation rates, laws forbidding incentive compensation and a slew of other regulations being placed on the for-profit sector, not much has changed in terms of outcomes. It seems that all of this federal meddling has led to...an escalation of tuition and the closure of 1,000s of career schools. I'm not exactly sure this was the intended outcome.

Just to touch a bit more on CDRs, I don't find it surprising at all that research produced in the 1980s reveals the same findings that current research on default rates does, namely that:

Studies that examine the effect of institutional type on default have sometimes been viewed as controversial because, given the structure of the student loan system; institutions themselves have no direct control over the borrower to influence his or her repayment

...students from different cohorts and varying income levels showed a considerable variance in their propensity for defaulting, supporting the idea that sectoral differences in default rates may at least be partially explained by differences in borrower’s characteristics

Defaulters have, regardless of institutional sector, significantly lower family incomes at the time the loan is made

the disadvantaged socioeconomic status of students attending proprietary and two year schools was found to be most strongly correlated with the likelihood of default, and institutional practices were found to be of limited importance