Will a Next Recession Spur Growth of Predatory Colleges & Training Providers, Again?
Fifteen years ago, when I was an Obama education official, I spoke to state regulators about their role in protecting consumers in higher education. Unfortunately, the speech is timely again.
In 2010, when I was deputy undersecretary at the U.S. Department of Education, I spoke at a meeting of state officials who oversee private college and training programs. I discussed the impact of the recession on the demand for education, the failure of public institutions to meet that demand, and the role of private schools — especially for-profit — to meet the demand. I explained that in the context of the federal investment, accountability — ensuring that students are not misled and are provided a quality education — was a priority for us.
I ticked through a list of the colleges with rapidly-growing federal aid, all of them for-profit. Some company representatives in the room felt scolded by the facts I recited. I didn’t intend to scold but my concerns did turn out to be justified. Of the eleven companies that I mentioned in 2010, seven are now gone, most of them revealed to have been engaging in predatory recruiting practices and providing a low-value education. (Underscoring the problem of potential industry capture, the company with the most people at the meeting — 10 at a conference of fewer than two hundred — was the infamous Corinthian Colleges).
For more than fifty years, explosions of rampant consumer abuses in postsecondary education has been on a repeating cycle of scandals, reforms, retreat, and repeat, as described in this TCF series I edited. Today we have, again, a recession possibly on the horizon, while the Trump Administration has eliminated the enforcement division of Federal Student Aid and slashed the staff who manage the college data that would provide the earliest warning signs of problems.
This week I spoke again at the same association of state regulators as 15 years ago, and I realized that my prior speech is not anywhere in the public domain. So I am publishing it below. Unfortunately, it may be timely.
Remarks by Deputy Undersecretary Robert Shireman
National Association of State Administrators and Supervisors of Private Schools
April 27, 2010
Two and a half or three years ago we started to see a serious economic slide downward in this country. Credit markets had seized up, the sub-prime mortgage issue was a major cause of that and we started seeing people losing their jobs, we saw people in their jobs feeling much more insecure, much less secure about their ability to invest in higher education, their ability to buy a home with the collapse of the credit market, and the way to solve that long-term is to invest in improving our nation’s productivity, to invest in the kind of innovation that comes from education, productivity increases that come from job training.
In order to follow-up on that President Obama laid out a bold goal for the country. He said that by 2020 we want to regain our place as the number one country in the world in terms of adults with postsecondary credentials: college degrees, certificates, and other job training programs.
In the recovery legislation now about a year and a half ago that included an expansion of the tax credits that I was a part of helping to create in the ‘90s. An expansion of that tax credit to $2500, making it four years and actually covering more of the types of expenses that students and families have for higher education. Increases in Pell grants, the usual approach in what you have seen in your own states is that in an economic downturn more people are poor, more people want to go to school, but instead of following up on that need by putting more money into the grant and scholarship programs, actually less money goes into the grant and scholarship programs because of the state budgets.
The federal government took the opposite approach, what really needs to be countercyclical spending that helps, like unemployment insurance, spending that needs to follow-up on and help to address the new gaps that families were seeing. The tax credits were a part of that, increases in Pell grants, not only meeting the new demand for Pell grant dollars but actually increasing the size of the Pell grants and providing those increases into the future with the follow-up legislation that passed a few weeks ago. Also, restoring some certainty to the student loan program and making sure that no one has any reason to doubt that they will be able to get the student loans that they need, again with the reforms that were implemented just a few weeks ago.
When people are losing their jobs, when people become insecure in their jobs, they look for higher education. They look to find “what kind of job training can I get, what kind of skills can I add to my repertoire, or skills that I have how can I make them better so that I’ll keep my job, or so that if I lose my job I will have options.”
And at the same time, while we saw this increase in demand for training, we saw state tax revenue declining in all but a few states. We saw, as a result, cuts in the budgets of state colleges and universities, and community colleges leading to a combination of very large increases in tuition in some cases and reduced enrollment, fewer seats. So with increased demand, people wanting more education and training, the public institutions either had fewer seats or charging more tuition. Or they might not say they are going to enroll fewer students but their course offerings are cut. The result is that they are not able to meet the demand for higher education. Tuition driven institutions didn’t react that way because they’re tuition driven.
Non-profit institutions have done pretty well despite significant declines in their endowments, because there has continued to be significant demand for higher education.
For-profit institutions have come in with investors helping to make sure there would be capacity to be able to serve additional students. They knew that those students would come with those federal dollars—Pell grants, student loans, tax credits—and that would help them to be not only consumers who want a higher education but consumers who can pay for higher education with that federal support.
So the for-profit industry, more than any other in these difficult times, has responded. And I wanted to give you some specific numbers. We actually post now on one of the FSA websites the quarterly amounts of Pell grants and student loans by different kinds of schools so I looked at what the first three quarters, the total of the first three quarters of this award year, compared to the first three quarters of last award year, for some of the schools that are here today.
For example, Corinthian Colleges, are there some folks here from Corinthian Colleges? Corinthian Colleges, 38% increase, first three quarters of this year compared to first three quarters of last year after a total of $800 million dollars. DeVry, a couple people here from DeVry? Maybe have left? 42% increase up to $1.7 billion dollars. ITT, you guys here? 44% percent increase up to $623 million dollars. Strayer, is Strayer still here? Is that you? Great. Well this one I don’t know. It’s a 95% increase and there may be something about the quarters but first three quarters of the year up to $414 million dollars. American Public University, is Wally back there and Russell back there? A 94% increase up to $44 million dollars. Kaplan, are they here? So this total is all of the Washington Post owned entities. 33% increase up to $909 million dollars and again this is three quarters of a year so the totals for any particular year are obviously more than that. Career Education Corporation. 29% increase up to a billion dollars for this first three quarters. EDMC, several folks I saw here on the list. 16% increase, $1.1 billion dollars. Capella, 40% increase, $378 million dollars and I think I’ve just got a couple of others. Grand Canyon University, 55% increase, $260 million dollars. And University of Phoenix. That’s Candice and Dan, right? 9% increase but obviously that’s on a larger base so probably that increase is as large as a lot of other peoples total dollar increase and that’s $2.7 billion dollars total. And Bridgepoint. You guys here? Not sure. 61% increase, $393 million dollars. I think those were all that I had numbers for obviously I know there are a few others here as well.
I want to thank the for-profit industry for responding to the critical demands from people out there who need higher education. I just want everyone out there to give them a hand.
Now, others of us in the room have the responsibility to make sure that those federal funds that I just listed for education and training, that it’s all totally above board. That those significant increases in federal spending for higher education, loans, grants, are serving students and taxpayers, as well as they possibly can. That is what the triad is about. (I know that I can say “the triad” in this audience because I heard somebody say it earlier!).
I want to talk for a second about some of the things that are going on in Washington right now, and I don’t mean negotiated rulemaking. I will get to that in a few minutes. There is a Wall Street reform debate going on right now in Washington. What happened in that credit crisis a couple of years ago had something to do with credit rating agencies. Agencies like Standard in Poors, Fitch, other agencies that were responsible for rating financial instruments, looking at what is the quality of the things that have names that cause people’s eyes to glaze over: collateralized debt obligations and other kinds of securitization. What is the quality of the loans, mortgages, are they going to be repaid? How likely are these loans to be repaid? How comfident can the investor be that they will get the return they are expecting?
The business model for these ratings agencies has come under fire in the discussions currently in Washington. On the one hand their responsibility, their job, the core of their business, was to make sure that they provided an honest rating for the instrument that they were analyzing. On the other hand, they relied on the income from the companies who asked them to rate the instrument. I’ll read to you from a New York Times article about some of the emails that have been coming out recently.
“In 2004, well before the risks embedded in Wall Street’s sub-prime mortgages became widely known, employees at Standard and Poors, a credit rating agency, were feeling pressure to expand the business. One employee warned in an internal email that the company would lose business if it failed to give high enough ratings to collateralized debt obligations, the investments that later emerged at the heart of the financial crisis. “We are meeting with your group this week to discuss adjusting criteria for rating CDOs of real estate assets this week because of the on-going threat of losing deals,” the email said. “Lose the CDO and lose the base business, a self-reinforcing loop.”
In other words, if we don’t loosen up in our assessment of these instruments nobody is going to come to us to have their instruments assessed by us anymore. The business model created a conflict which led to instruments which should have been questioned not being questioned, leading to the financial crisis that we all have been suffering from for the past couple of years. The other issue besides the business model was the complexity and fast growth of different kinds of instruments. I’ll read from another of the recent articles.
“Email messages and other documents suggested that investment analysts at rating agencies embraced new business from Wall Street even though they recognized they couldn’t properly analyze all of the bank’s products.”
And one of the other quotes ends with: “we were so overwhelmed”.
On that issue of the complexity of growth, I know we’re feeling this with publicly traded corporations, and purchases going this way and that way and trying to figure out everything that’s going on. Are there regulators in the room who feel like you do have the analytical firepower you need to assess what is going on with the entities you regulate in higher education? I don’t think we feel we have the firepower we need.
On financial reform, one expert is saying the proposal in Congress only tinkers with the workings of the ratings agencies. It doesn’t end with what he calls “inherent conflicts of interest”. Those conflicts of interest where the people who do the ratings are paid by those who do the ratings. This whole situation with credit agencies, credit rating agencies, is as I see it very similar to the way that accrediting agencies work in this country. They have same kind of inherent conflict of interest, albeit accrediting agencies are non-profit. And on top of that, what would this crisis have looked like if the banks had been the ones actually running the credit agencies and they were doing a peer review kind of model? That is the model that we have in accreditation: it is the regulated who are really looking at each other, rather than an outside entity doing the assessment.
Accreditation as a part of that triad, in terms of a way of assessing quality in higher education, is, to borrow from Winston Churchill, the worst form of accountability except for all of the others. What Churchill actually said is, "Democracy is the worst form of government, except for all of the others.” I am bringing up this issue of accreditation not to say that we should back away from it or change it. I actually don’t have a better system for us for assessing quality for higher education but it is problematic and we need to remember that as the other two pieces of the triad as we figure out how we can do the best job possible in our responsibilities.
Federal and State government cannot rely on accreditation to ensure that consumers and taxpayers are protected to the full extent that they need to be. All three legs of that three legged stool need to be working and working well. There are a number of things we are doing, you’ve heard about some of them.
Elevating monitoring and enforcement, we are working with the Inspector General at the Department of Education, taking a much closer look at data than ever before to help guide our selection of program review and investigations when necessary by the Inspector General.
Working with the Federal Trade Commission to join their consumer complaint system so that the complaints they get and other agencies that are on the Consumer Sentinel, working on the issue of how we can look more at issues of misrepresentation as we do program reviews and other kinds of monitoring.
Besides monitoring and enforcement we are improving consumer information. We have put graduation rates, retention rates, and transfer rates right on the FAFSA form when students are choosing colleges. The rates are right there as a reminder to students that they should do some good shopping, looking at various kinds of data that might help them to compare schools.
We are also providing them with a more detailed financial aid estimate in terms of the federal aid they can get. And this is partly to let them know that they can get that aid wherever they go. Sometimes students think, oh I can get $12,000 dollars because this schools costs $12,000 and I would only get $3,000 dollars if I went to a community college that only costs $3,000 not realizing that in fact if they wanted to get more than want that tuition costs at that community college so that they can focus on their studies rather than working excessive hours that this is something that is available to them.
And starting this summer as a part of a regulatory process that has already completed schools will begin to have to provide placement information where they have placement rates they will actually have to make students on their websites aware of placement rates for programs that they are offering.
Coordination and sharing, I heard some of the discussion earlier I look forward to this afternoon. There is discussion about coordination within the federal government, too. We are working with the Federal Trade Commission with the Veterans Administration around the GI bill, the Security and Exchange Commission because of the involvement of publicly traded corporations.
With regard to States, we have encouraged involvement in this group and are looking for other ways that we can help. I’m happy to discuss that in the Q&A here as well as this afternoon because we need to become really good partners if we’re going to do best by taxpayers and students. And accreditors. We shared some draft guidance related to new requirements for accreditors. The whole triad. I was actually on the internet looking for a three legged stool to see if I could bring one for this presentation and I noticed that one of the three-legged stools had not only the three legs but it had this connecting piece of wood that held the three legs together and I thought that would be the perfect prop because that would demonstrate that it would be a strong stool if those connecting pieces are there. They makes it as strong as possible.
We are also, as most of you have heard, reviewing the rules and regulations, and where appropriate revising those rules. Let me take a little bit of time to tell you about some of those. We started about a year ago doing public hearings where we basically asked how we can improve program integrity. Are there things that we need to be doing? We gave a list of some of the areas—misrepresentation, definition of a credit hour, state authorization, other kinds of things—and we sought input. We held three public hearings, people were able to submit items over the internet, through email, and we got a lot of input about great schools out there, students who were having a great experience, students who attended a school, got a job, and had a great experience.
We also heard from former students who felt that they were misled, we heard from legal aid attorneys who had clients that from their stories anyways were cause for concern. That was followed up by a request for nominations, people to serve on a committee. The way that this whole process works is we do our best to work through possible rule changes with a committee of stakeholders recommended or nominated by interested parties.
States, various kinds of institutions, student organizations, legal aid, and for three weeklong sessions in I think it was December, January, and February, we went through each of fourteen issues, talking through what are the changes that—what are the issues, what are the possible issues—that might make sense. One of them, misrepresentation, just some clarification really of our rules against misrepresentation by schools.
High school diploma, it’s one of those things that you talk to somebody and you think, “Well, how hard can it be to know that a high school diploma is valid?” And it turns out it’s not that easy. Yet the federal government declaring what is a valid high school education potentially gets into areas where the federal government isn’t supposed to operate. So it’s a more complicated issue then I think a lot of people expected, and we—at least in the negotiated rulemaking session—are getting some tentative agreement to some changes of the definition. I would say that the most significant thing that we are doing is, when people apply on the FAFSA, it will actually pop up a list and it will say what that high school is, the name of the high school based on some federal list that we have. It won’t actually mean that it is a valid high school but it does give us a you the ability, for example, if there is a suspected diploma mill we would be able to see where are the students going who are using this particular high school as the place where they say they get their diploma and if we find that is some particular colleges then that would be evidence that they might be encouraging people to go and use that particular diploma mill so it would be a useful tool for us and I think for you as well. And it’s the most important change that we will be making there.
Definition of a credit hour, incentive compensation was a major issue. The issue of paid recruiters, a number of years ago a number of safe harbors were created and a lot of indication that those perhaps were wider loopholes then are appropriate given the wording of the actual law that prohibits payment of compensation based on enrollment.
State authorization, I heard California mentioned a little while ago. It was a surprise to me, when I came to Washington, D.C., to discover that the legal interpretation the Department of Education was that well if the school is not authorized then it’s authorized. So, this raised questions that came up in negotiated rulemaking about what is at least some minimum standard of what kind of authorization should count in terms of the state role in that triad.
Satisfactory academic progress is another area, taking attendance, what I used to call R2D2, in terms of Title IV, R2T4.
I’m not mentioning all of the issues but the final one I will talk some about is gainful employment. This is the one that has been in the news a lot and it seems that every time I speak somewhere it seems like someone in the room thinks I said something new and calls a stock analyst who then reports it and it causes stocks to go up or down or whatever. I assure you that I am not going to say anything new. If you are a stock analyst or you know a stock analyst the answer when they ask “what did Shireman say” you say “nothing new”.
So, the statute, the Federal law requires that in order for some programs to be eligible for federal financial aid they have to lead to gainful employment in a recognized occupation. This applies to non-degree programs in any type of school and it applies to most programs at for-profit schools. Really all except some bachelors degree, liberal arts programs, through an recently enacted exception that actually begins this July 1st, or I think it actually began this July 1st, it’s a narrower exception which for the most part for-profit institutions in order to be eligible for federal financial aid has to show that the program leads to gainful employment or prepares students for gainful employment in a recognized occupation.
A year ago, we began asking the question what is the definition, what should be the definition for gainful employment in a recognized occupation? We had hoped that perhaps some schools would come forward and say well when we start a program here’s how we determine whether or not it complies. We didn’t get that kind of information. We brought it up at negotiated rulemaking. We made some suggestions for discussion. We suggested, “well maybe there should be some relationship to the debt-levels that the students are taking on and the expected earnings that they may have from the occupations that you have identified that you are preparing people for.” We also suggested that perhaps a loan repayment approach could be devised where we would be able to see that federal loans are actually being repaid at a rate that makes sense if people were actually gainfully employed. We looked at the provision in current regulations that applies to very short term programs, the 70-70 rule, so 70 percent completion rate and 70 percent placement rate. And asked well, with something like that, should that be part of a definition of gainful employment. And then for new programs we suggested well maybe there should be something from an employer for someone who employs people from the occupations that the program is preparing people for, who at least asserts that yes the curriculum, the program that I’ve seen at this school, is designed in a way that would prepare people for the jobs that I have in my particular business, so we suggested that for new programs.
Now in every other issue for negotiated rulemaking we‘ve got pretty good discussion at the table. Sometimes we actually got consensus from the group on what we should actually, how we should word the regulation, how it should be worked out. But for some reason on the gainful employment issues we didn’t get the kind of discussion that would at least help to guide in a very constructive way the direction and to know if this would be okay with certain kinds of schools, or wouldn’t be okay with other kinds of schools. Instead the reaction from, in particular, those who were representing the for-profit colleges was, “you can’t do this, you can’t define this term, why are you doing this?” and that reaction continued even after the negotiated rulemaking sessions.
We continued to meet and we have gotten improved input and improved feedback and where things stand now with the whole regulatory package including everything I just described including gainful employment is that in the next few weeks there will be a proposed rule published in the federal register. There will be a comment period after that proposed rule is published, that will be the appropriate time to suggest changes or express support for provisions, or suggest alternatives, and then a final role will be to publish a final rule by November 1st for rules to take in effect a year from this July. They need to be published by November 1st so that’s where we will be, that’s the timing for rulemaking going forward.
I wanted to conclude my remarks before going to some Q&A and discussion with a piece that or a couple paragraphs from a piece that Thomas Frank wrote in the Wall Street Journal. The title of the article is “Obama and Regulatory Capture.” And it was again back about the financial regulation.
“It was not merely structural problems that led certain regulators to nap through the crisis. The people who filled regulatory jobs in the past administration were asleep at the switch because they were supposed to be. It was as though they had been hired for their extraordinary powers of drowsiness.
“The reason for that is simple: There are powerful institutions that don't like being regulated. Regulation sometimes cuts into their profits and interferes with their business. So they have used the political process to sabotage, redirect, defund, undo or hijack the regulatory state since the regulatory state was first invented.”
He follows that up, one more line here, “And it created a situation where banking regulators posed for pictures with banking lobbyists while putting a chainsaw to a pile of regulations. Smiles all around. Let the fellows at IndyMac do whatever they want.”
So my closing words are, we should take the photos, we should smile, but let’s not shirk our responsibility for regulating the industry. The schools will make plenty of money and students and taxpayers will be better off if we do our jobs as best as we can.
Thank you very much.