Fixing Fraud at For-Profit Colleges

Just last month, the Federal Trade Commission (FTC) put 70 for-profit colleges and universities on notice for potentially deceptive conduct in the higher education marketplace. In issuing a Notice of Penalty Offenses, the FTC clarified its intention to revive its dormant Penalty Offense Authority, under which for-profit schools could be punished for deceptive practices, such as fraudulent advertisements about student success.

The fact that a school received the FTC’s notice does not indicate wrongdoing. The agency’s announcement does, however, signal a renewed interest in regulating the behavior of for-profit schools.

In 1998, Congress updated the Higher Education Act (HEA) to contain the 90/10 rule, which mandates that proprietary institutions derive at least 10 percent of their annual revenue from sources other than the government. The rule acts as a proxy for measuring educational quality by ensuring that for-profit schools offer an education supported by at least some of students’ own money. President Barack Obama championed strict enforcement of the 90/10 rule.

President Obama furthered his enforcement efforts by adding the Gainful Employment (GE) rule to the HEA in 2014, requiring for-profit schools to prove that the majority of their students were eligible for employment following graduation. In 2016, he also reintroduced the Borrower Defense to Repayment (BDR) rule, which made students whose schools had misled them eligible for the partial or full discharge of their federal student loan debt.

The Trump administration repealed the GE rule and suspended BDR regulations. Now, however, for-profit institutions anticipate the reinstitution of Obama-era policies. Higher education experts recognize many ways in which the Biden administration can best intervene to hold for-profit schools accountable. Some experts suggest that state governments should intervene as regulatory actors. Others call for harsher, federal-level interventions.

In this week’s Saturday Seminar, scholars consider an array of solutions for better regulating the behavior of for-profit institutions of higher education.

• In a working paper published by Brown University’s Annenberg Institute, Stephanie Riegg Cellini of the George Washington Institute of Public Policy argues that for-profit institutions capture a substantial portion of federal student-aid subsidies while leaving the vast majority of borrowers worse off than graduates from schools in other sectors. One solution, Cellini suggests, is for policymakers to increase accountability measures to protect borrowers and taxpayers from harmful practices in the for-profit sector. She also recommends that borrowers switch to better-performing institutions in the face of such practices as a means of holding low-performing institutions accountable.
• In an article for The Century Foundation, Robert Shireman argues that federal regulation of for-profit colleges occurs in a cycle. Federal funds create financial incentives that lead to underperformance and questionable practices by for-profit colleges, which prompt federal regulation. But once the regulations work, Congress relaxes them and again allows for repeat offenses. Shireman recommends several policies to break this cycle, including requiring accreditation, banning federal aid to programs that create huge debt burdens, and improving information provided to consumers.
• Policymakers should increase oversight of for-profit college advertising, argue Stephanie Riegg Cellini of The George Washington University and Latika Hartmann of the Naval Postgraduate School. In a report for the Brookings Institution, Cellini and Hartmann assess the advertising expenditures of all degree-granting institutions from 2001 to 2017. They report that although for-profit colleges serve just 6 percent of students, they account for over 40 percent of all college advertising dollars. Moreover, for-profit colleges spend four times as much on advertising per student as nonprofits. Cellini and Hartmann call for increased mandatory disclosures on college advertising, recruitment, and marketing expenditures. They also propose stronger enforcement of laws prohibiting misrepresentation.
• In an article in the UC Irvine Law Review, Matthew A. Bruckner of Howard University School of Law argues that the higher education “regulatory triad”—composed of the U.S. Department of Education accrediting agencies, and states—is failing to protect student loan borrowers from predatory institutions. Bruckner focuses on states, contending that they are “best positioned” to protect students from fraudulent practices. Because federal policy can change drastically between administrations, Bruckner proposes that states should implement their own gainful employment rules. In addition, Bruckner suggests that states should comprehensively evaluate colleges for adequate material and human resources before authorizing their operation. By taking additional regulatory measures, Bruckner argues that states can become “stewards of higher educational quality.”
• Private student loan borrowers, particularly those attending for-profit schools, face a severe lack of consumer protections, argues Prentiss Cox of the University of Minnesota Law School, Judith Fox of Notre Dame Law School, and Stacey Tutt of UC Irvine School of Law. In an article published in the UC Irvine Law Review, Cox, Fox, and Tutt propose state-level policies modeled after existing federal frameworks to bolster consumer protections. First, they suggest that states use the FTC’s “Holder Rule” as a template for enacting the model Private Student Borrower Protection Act, which would require private loan contracts to ensure the kinds of protection afforded to federal student loan borrowers. Second, they urge states to enact the model Private Student Loan Mediation Act, which would create “mandatory mediation programs” based on successful state-level mortgage programs implemented during the 2008 financial crisis.
• In a policy brief for The Center for American Progress, research assistant Melissa Alayna Navarro explains how the Accrediting Commission of Career Schools and Colleges (ACCSC) failed to revoke the accreditation of a fraudulent organization operating for-profit colleges for over a decade. Navarro explains that the ACCSC had numerous opportunities to revoke accreditation but did not, instead allowing for-profit colleges to accept over $1.8 billion dollars from the federal government and put students in harmful situations. Navarro demands an investigation of the ACCSC and advocates that the U.S. Department of Education should increase its oversight over for-profit colleges.