A Possible For-Profit Accountability Compromise?

In the midst of an absolutely bonkers week in the world of higher education (highlighted by a FBI investigation into an elite college admissions scandal, although the sudden closure of Argosy University deserves far more attention than rich families doing stupid things), the U.S. House Appropriations Committee held a hearing on for-profit colleges. Not surprisingly, the hearing quickly developed familiar fault lines: Democrats pushed for tighter oversight over “predatory” colleges, while Republicans repeatedly called for applying the same regulations to both for-profit and nonprofit colleges.

One of the key sticking points in Higher Education Act (HEA) reauthorization is likely to be around the so-called “90/10” rule, which requires for-profit colleges to get at least 10% of their revenue from sources other than federal financial aid (excluding veterans’ benefits) in order to qualify for federal financial aid. Democrats want to return the rule to 85/15 (as it was in the past) and count veterans’ benefits in the federal funds portion of the calculation, which would trip up many for-profit colleges. (Because public colleges get state funds and many private colleges have at least modest endowments, this rule is generally not an issue for them.) Republicans have proposed getting rid of 90/10 in their vision for HEA reauthorization.

I have a fair amount of skepticism about the effectiveness of the 90/10 rule in the for-profit sector, particularly as tuition prices need to be above federal aid limits and for-profit colleges tend to serve students with relatively little ability to pay for their own education. But I also worry about colleges with poor student outcomes sucking up large amounts of federal funds with relatively few strings attached. So, while watching the panelists at the House hearing talk about the 90/10 rule, the framework of an idea on for-profit accountability (which may admittedly be crazy) came into my mind.

I am tossing out the idea of tying the percentage of revenue that colleges can receive from federal funds (including veterans’ benefits as federal funds) to the institution’s performance on a number of metrics. For the sake of simplicity, let’s assume the three outcomes are graduation rates, earnings after attending college, and student loan repayment rates—although other measures are certainly possible. Then I will break each of these outcomes into thirds based on the predominant type of credential awarded (certificate, associate degree, or bachelor’s degree), restricting the sample to broad-access college to reflect the realities of the for-profit sector.

A college that performed in the top third on all three measures would qualify for the maximum share of revenue from federal funds—let’s say 100%. A college in the top third on two measures and in the middle third on the other one could get 95%, and the percentage would drop by 5% (or some set amount) as the college’s performance dropped. Colleges in the bottom third on all three measures would only get 60% of revenue from federal funds.

This type of system would effectively remove the limit on federal funds for high-performing for-profit colleges, while severely tightening it for low performers. Could this idea gain bipartisan support (after a fair amount of model testing)? Possibly. Is it worth at least thinking through? I would love your thoughts on that.

Key Takeaways from the House Higher Education Act Reauthorization Bill

Majority Republicans on the U.S. House Committee on Education and the Workforce unveiled their draft legislation today to reauthorize the Higher Education Act—the most important piece of legislation affecting American higher education. The Promoting Real Opportunity, Success, and Prosperity through Education Reform (PROSPER) Act checks in at a hefty 542 pages and touches many important aspects of higher education. I live-tweeted my first read through the bill (read the thread here), and in this blog post I am sharing some thoughts on the key themes of the legislation.

Takeaway 1: This bill would undo many Obama-era regulations and salt the earth on future regulations. It’s no secret that Republicans didn’t care for regulations such as gainful employment, borrower defense to repayment, or providing a federal definition of the credit hour. The PROSPER Act would not only undo the regulations, but prohibit the Secretary of Education from promulgating any future regulations (meaning that Congress would have to pass legislation to create any new rules). The Secretary of Education would also be prohibited from creating a federal college ratings system, even though the Obama-era effort to do so was unsuccessful.

Takeaway 2: The federal student loan system would be radically overhauled. Instead of the array of loans that are now available, there would be three flavors of a federal ONE Loan—for undergraduates, parents, and graduate students. The key details are below.

 

  Undergrad (dependent) Undergrad (independent) Parent Grad student
Annual limit (current) $5,500-$7,500 $9,500-$12,500 Cost of attendance Cost of attendance
Annual limit (PROSPER) $7,500-$11,500 $11,500-$14,500 $12,500 $28,500
Lifetime limit (current) $31,000 $57,500 Cost of attendance Cost of attendance
Lifetime limit (PROSPER) $39,000 $60,250 $56,250 $150,000

Note: Medical students have higher loan limits than what is listed above.

Undergraduate students actually have higher loan limits, but the PROSPER Act would also allow colleges to limit borrowing by student major if they feel students are unlikely to repay their obligations. Financial aid administrators have sought this authority for years, which means that students could actually see lower loan limits. Graduate students, on the other hand, would be limited to $28,500 per year and $150,000 overall in federal loans. Given that tuition alone often exceeds this number, expect students to turn to the private market (when possible) to finance their education.

The PROSPER Act also drastically changes income-driven repayment programs. Instead of the range of programs available now, future borrowers could choose between the standard ten-year payment plan or an income-driven plan that would allow them to pay 15% of their discretionary income (over 150% of the federal poverty line) for as long as necessary to repay the loan. There would be no ending date to payments, and payments for married couples would be based on both spouses’ incomes even if they file their taxes separately. (Both of these provisions differ from current law.) The Public Service Loan Forgiveness program, which was only mentioned once in passing in the entire bill, would also end. However, people in the program now would be grandfathered in.

Takeaway 3: Colleges would be held accountable for their outcomes in new ways. The cohort default rate metric (which I’m no fan of) would be replaced by a repayment rate metric. If a program (not a college) had more than 45% of its borrowers at least 90 days delinquent or in certain types of deferment for three consecutive years, it would lose access to all federal financial aid. This is a more generous definition of repayment for colleges than the College Scorecard’s definition (repaying at least $1 in principal), so I can’t say how many colleges would actually be affected.

Another interesting piece is that colleges would have to repay at least a portion of federal financial aid dollars given to students who left college during a semester. Right now, colleges can try to claw back those funds, but this proposal would limit colleges to trying to collect 10% of the amount owed back from students. This is similar to what Matt Chingos and Kristin Blagg have proposed in a policy brief.

There are so many other interesting points in this legislation, but I think these are the three most important ones that I can speak to based on my experience and research. Keep in mind that the Senate will also introduce a Higher Education Act reauthorization bill sometime in 2018, and that the two bills may differ significantly from each other.