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Who Profits?


The Weekly Standard. May 5, 2014.

A raft of new Education Department regulations has been bobbing among the roiling waters of American higher education for nearly a month now, and perhaps the most sensible reaction to the controversy comes from Sen. Lamar Alexander—a former governor, college president, and secretary of education. His simple but elegant option: Stop. Then start over.

The new rules work the way government regulations often do. They address a genuine if relatively small problem with a large and bafflingly complicated solution aimed at one business sector currently disfavored by government while leaving another sector, as needful of reform but favored by government, entirely alone. Just another day at the office.

The unlucky targets of the regulations, which have been in process since not long after President Obama took office, are the nation’s roughly 3,500 proprietary colleges and universities. “Proprietary” is the term that these privately owned and operated businesses prefer to use to describe themselves. The regulators prefer to call them “for profit” colleges and universities. “He who controls the language controls the issue” is a timeless maxim of Washington disputation. Regulators and activists—and journalists, too, of course—use the phrase “for profit” to suggest that something vaguely disreputable is going on. Moneymaking to the progressive mind is grubby and low class, so distant in spirit from the pristine, rarefied air of real education.

What the for-profits do is not pristine or rarefied, but it is necessary and in a way even noble. They correct a failure in the higher education market by serving nontraditional students that other post-secondary schools haven’t reached. Today more than 13 percent of the students enrolled in degree-granting post-secondary schools attend a for-profit program. As a group the students are heavily weighted toward what the trade calls nontraditional: veterans, oldsters, the disabled, single mothers, and people who are already employed but seeking new jobs in new fields. The vocational schools and community colleges that would normally have been expected to serve them are at capacity already and in many cases shrinking. California, for instance, cut more than a half million students from its community college system between 2009 and 2012.

The proprietaries have strengths and weaknesses compared with their public counterparts. They are more flexible in meeting the irregular needs of nontraditional students, in scheduling and location and the ability to adjust to new kinds of jobs and new technological demands. At for-profits the completion rates for one- and two-year certificate programs are nearly 10 percent higher than in comparable public schools. At the same time, the rate at which students default on their (taxpayer-guaranteed) student loans is scandalously high: 26 percent, compared with 10 percent at community colleges and 4 percent for four-year students. Like most other businesses—even nonprofits!—the trade has drawn its share of con-men and bunco artists.

From these unhappy facts—and from a rich store of real anecdotes—activists and their surrogates in the bureaucracy have formed a caricature of a rapacious, fly-by-night industry urging the little people to take on loads of debt, snuffling up piles of government loans and grants, and then leaving them helpless, with worthless degrees, no job prospects, and loans they have no hope of repaying. The caricature is four parts ideology to one part fact, but it serves its purpose of legitimizing the federal intervention that activists and bureaucrats have agitated for.

The intervention here is 841 pages of draft regulations issued for public comment last month. They are endlessly, mysteriously, often pointlessly complicated. To simplify as much as possible: The government will effectively shut down for-profit programs that don’t meet its newly minted criteria for acceptable levels of student debt. A school’s average student debt, for example, may not exceed 8 percent of students’ total income or 20 percent of their disposable income, even if they pay back their loans in full and on time. Any school with a student-loan default rate higher than 30 percent will no longer be eligible for the loans, putting it out of business. The new restrictions, says Education Secretary Arne Duncan, will likely shutter 20 percent of for-profit programs and place another 10 percent on a path to closing. Note that traditional nonprofit schools are exempt from the new rules, regardless of their student debt levels or default rates.

The new regulations will force many schools away from nontraditional students toward those—whiter, richer, younger—who pose less risk of default. Students who want to prepare for valuable but low-paying jobs in education or social work will have more difficulty finding a program to train them. Duncan’s regulators are silent on where the nontraditional students are supposed to go. The rules will severely restrict the variety and flexibility of higher education options, and the market failure that the for-profits are meant to correct will reassert itself. As the Harvard economist David Deming told the New York Times, the proprietaries “are reaching students in a different way, opening in places where there are no community colleges. They are filling in the cracks.” The cracks will reopen.

Perhaps most galling of all, the caricature of for-profits that undergirds the new rules—of a rapacious industry encouraging students to take on mountains of debt for worthless degrees—can be applied, with equal force, to many nonprofit colleges and universities too. Both sectors of the higher education industry have become ravenous creatures of the federal government, hopelessly dependent for their survival on federally guaranteed loans and grants. While the regulators penalize the for-profits, the nonprofits are free to spend their guaranteed loans and grants on new athletic centers, lavish food courts, designer dormitories, world-class sports teams, and other First World amenities in hopes of attracting still more students who will, in turn, take on still more debt. The difference is that for-profits are candid about their goal of making money. Anyone who has walked across a handsomely landscaped traditional campus lately will recall the wise man’s admonition: “Nonprofit” is a term of art in the tax code, not an operating philosophy.

Of course, we would do well not to romanticize the for-profit college industry. More rigorous self-policing might have saved it from the worst of the regulations’ effects. And the biggest and most successful of the companies are owned in large part by Wall Street investment banks and hedge funds, not well known for their charitable outreach. But these guys do know how to play defense. They have spent lavishly on Washington talent to press their case to Congress, with varying degrees of knowledge and sincerity. The left-wing gadfly David Halperin has gleefully documented the range of celebrities whose pockets have filled with the industry’s silver: from Colin Powell to Bob Kerrey to Lanny Davis to Wesley Clark to the education reformer Michelle Rhee. It’s easy to view the dispute between the for-profits and the buttinski educrats as another Battle of Stalingrad: Both sides deserve to lose. But the students don’t, and they might if Washington wins.

The power grab by the education bureaucracy is best understood in procedural and institutional terms. It is an extension of the imperial style that President Obama has used ever since the Republican takeover of the House in 2010 made executive-congressional cooperation messy and unpleasant and, in most cases, impossible. The executive is seizing territory that is rightly Congress’s—territory that should be shaped through political rather than bureaucratic means. Here as elsewhere, however, the administration doesn’t want to be troubled with the messiness of democratic process. As one excited, if slightly indiscreet, activist put it when the regulations were issued: The best thing about them is “the plan can be implemented without any congressional involvement.” How nice for the president and his regulators.

This is why Alexander’s elegant solution strikes the right note. He suggests scrapping the new regulations altogether and addressing the loan-default problem in a new Higher Education Act. The act is where the department claims its statutory authority lies anyway. A reauthorization is already grinding its way through the Capitol Hill scrapple factory, and Alexander calls for a top-to-bottom rewrite rather than a revision around the margins. The principles of a new act, he says, were once explained to him by another university president: “Autonomy. Competition. Choice. Excellence.” Who could argue? “And,” Alexander goes on, “I would add one more—Deregulation.” This is a spirit foreign to the existing Higher Education Act, and to the new regulations.

We can only admire Alexander’s ambition. A rewrite will be a huge undertaking. But then higher ed—for-profit, nonprofit, or anywhere in between—is a huge business. If you’ll forgive the expression.