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    An overlooked yet fierce battle has been transpiring in America's higher education industry. The battle is over federal financial aid to for-profit colleges. There are two primary issues in the dispute: first, what is an acceptable metric to determine if a for-profit college's default rate is high enough to disqualify it from receiving federal financial aid; second, and more generally, are for-profit colleges providing a cost-effective option for students? Therefore, because of the importance of this issue, an overview is imperative. .

    First, I will examine the primary participants in the battle. The parties seeking increased oversight and regulation of the for-profit industry are primarily the Obama Administration and Senator Tom Harkin (D-IA). The Administration has sought to utilize the regulatory authority of the U.S. Department of Education to enact reform. Additionally, Senator Harkin has directed the congressional reform effort through his authority as Chairman of the U.S. Senate Subcommittee on Labor, Health and Human Services, Education, and Related Agencies. Conversely, the plethora of participants in the for-profit college industry have opposed the reform efforts; e.g., the Association of Private Sector Colleges and Universities (APSCU), Kaplan Higher Education, and the Apollo Group which owns the University of Phoenix.

    The catalyst of the battle was a 2008 law that changes the metric the Department of Education utilizes to determine default rates. The metric from the previous law, which is effective until 2014, utilized a method labeled the "two-year cohort default rate;" i.e., it tracks defaults from a group of borrowers who default within a two-year window after loans come due. The new metric utilizes three-year default rates. The new metric is contentious because federal law stipulates that if the default rate for a college exceeds 30 percent, then the college becomes ineligible to receive federal financial aid. Moreover, according to a preliminary report released in February by the Department of Education, the new metric would push many for-profit colleges above the threshold. Additionally, with the extra year added, the average default rate for the for-profit industry increased from 11.6 percent to 25 percent.

    Kaplan Higher Education, a for-profit college corporation, responded to the preliminary report by stating: "These "informational" 3-year rates are not indicative of what actual 3-year cohort default rates will be under the new requirements. Until now, schools like ours have focused on complying with the 2-year default requirements. We have a variety of new initiatives under way that will help our schools meet the 3-year requirements. We believe that these changes will improve our default rates so that we are within the new regulatory standards when they become applicable." Responses from other for-profit colleges were similar to Kaplan's response.

    Conversely, Senator Harkin's response was unequivocally negative. "These numbers paint a troubling picture of life for students after they leave a for-profit college, with one quarter of for-profit college students defaulting on their loans within three years of leaving school," he stated. "It is also clear from these default rates that students who attend for-profit colleges are dramatically worse off after they leave than students at private or public nonprofit schools. And with for-profit students amounting for almost half of all student loan defaults, serious questions have to be raised about the taxpayer investment in these companies."

    In conjunction with the change in the default rate metric, the Department of Education is expected to increase its regulation of for-profit colleges. It released a proposal in October 2010 delineating the provisions. While the proposal would also apply to nonprofit private and public colleges, it is designed primarily to regulate the for-profit industry. The proposed provisions would increase consumer protection to ensure that only eligible students receive federal aid; additionally, the provisions would also clarify for which courses and programs students can use federal aid dollars. According to Secretary of Education Arne Duncan, "these new rules will help ensure that students are getting from schools what they pay for: solid preparation for a good job. A comprehensive list of the rules as delineated by the Department of Education will be posted succeeding this article.

    Of the myriad provisions proposed by the Department of Education, the most controversial has been the new "gainful employment" provision. The new provision would require colleges to meet certain debt-to-income and student loan repayment criteria to qualify for federal financial aid. The Department has heretofore not released a finalized version of the "gainful employment" provision, but it is forthcoming.

    The proposal has received strident opposition from for-profit colleges. In January the APSCU filed a federal lawsuit against three of the proposal's provisions (state authorization of colleges, incentive compensation for recruiters, and misrepresentation of colleges' programs and results). Furthermore, the APSCU and for-profit college companies have waged an extensive media campaign to refute the claims made by opponents of for-profit colleges.

    The battle has heretofore been fierce, and it is far from concluding. Furthermore, once the Department of Education releases a finalized version of the "gainful employment" provision, the battle will become more antagonistic and contentious. Make certain to check the Michigan Policy Network for updates.

    The provisions of the proposal as summarized by the Department of Education:

    Holding Programs Accountable for Preparing Students for Gainful Employment

    • Graduation Rate and Job Placement Disclosures: This rule would require proprietary institutions of higher education and postsecondary vocational institutions to provide prospective students with each eligible program's graduation and job placement rates, and require that colleges provide the Department with information that will allow the determination of student debt levels and incomes after program completion.
    • Approval of Additional Programs: The Department's proposed regulations on gainful employment would create a two-part measurement to determine a program's ability to participate in federal student aid programs. The proposed measurement is based on loan repayment rates and debt to income ratios and requires at a least four years of repayment history, and three years of employment history to properly calculate the data. If institutions that have a poor track record in preparing students for gainful employment create a large number of new programs, or restructure existing programs, this could allow them to game the system and circumvent the proposed regulations in advance of their publication because the Department would lack sufficient data to measure their effectiveness for several years. To prevent potential abuse, the Department is proposing that institutions give notice when introducing a new program. If the Department has concerns, institutions will be asked to formally apply for new program approval based on several factors including whether the number of additional educational programs being added is inconsistent with the institution's historic program offerings, growth, and operations. The Department expects that very few new programs will be subject to this type of approval.

    Protecting consumers from misleading or overly aggressive recruiting practices, and clarifying state oversight responsibilities. The regulation strengthens three current requirements that are designed to protect students and taxpayers:

    • Misrepresentation: During public hearings and negotiated rulemaking sessions, the Department heard numerous complaints from students enrolled in programs in which they felt misled on what was and was not being offered, the way programs could be paid for, and their job prospects upon completion. To protect consumers, the regulations strengthen the Department's authority to take action against institutions engaging in deceptive advertising, marketing, and sales practices.
    • Incentive Compensation: The Department heard reports of aggressive recruiting practices resulting in students being encouraged to take out loans they could not afford or enroll in programs where they were either unqualified or could not succeed. Though current laws prohibit schools from compensating admissions recruiters based solely on success in securing student enrollment, provisions known as "safe harbors" allowed this questionable practice. The regulations remove all the "safe harbor" provisions.
    • State Authorization: State authorization is required by the Higher Education Act for a postsecondary institution to participate in federal student aid and other federal funding programs. Some states have failed to establish how they approve and monitor postsecondary programs. The regulations clarify, for federal program purposes, the minimum a state must do to meet this important responsibility to protect students, including for schools that offer distance or correspondence education.

    Ensuring that only eligible students receive federal funds. Generally students are eligible for aid only if they have a high school diploma or pass an "ability to benefit" test, and only if their academic standing is satisfactory. Today's final rule will help more qualified students receive aid while strengthening protections against fraud:

    • High School Diploma: The proliferation of high school diploma mills has called the validity of some secondary school credentials into question. The regulation requires institutions to develop and follow procedures to evaluate the validity of a student's high school diploma if the institution or the Secretary has reason to believe that the diploma is not valid or was not obtained from an entity that provides secondary school education.
    • College Credits: The regulations extend eligibility for federal student aid to students without high school diplomas after they successfully complete six credits of college work, or the equivalent amount of coursework. This implements a provision that was included in the Higher Education Opportunity Act of 2008.
    • Ability To Benefit (ATB): The Department is responsible for approving ATB test materials developed by testing companies. To improve its oversight of how ATB tests are administered, the regulation revises test approval procedures and criteria, including those related to tests for speakers of other languages and persons with disabilities.
    • Satisfactory Academic Progress: Every institution is required to have a policy to ensure that all of its students are achieving satisfactory academic progress. Audits and institutional program reviews have uncovered policies that provide federal financial aid to students who do not meet institutions' academic standards. The regulations require a structured and consistent approach to evaluating a student's academic work, while continuing to provide flexibility to institutions in establishing their policies.
    • Verification: Each year, millions of students are required to confirm the information on their Free Application for Federal Student Aid (FAFSA). The regulation reforms this process to reduce burdens on students and colleges, better identify fraud, and take advantage of the increased use of the FAFSA simplification efforts that have increased the use of Internal Revenue Service data. To allow more time for institutions to prepare, the effective date of this provision will be delayed until July 1, 2012.

    Clarifying the courses that are eligible for federal aid, and the amount of aid that is appropriate.

    • Credit Hour: Credit hours are the metric used by the Department to measure eligibility for federal funding. Currently there is no standard definition for a credit hour, which has led to reports of institutions awarding more credits-and awarding students more college aid-than deserved. To address this issue, the regulations define a credit hour and establish procedures for accrediting agencies to determine whether an institution's assignment of a credit hour is acceptable. Recognizing that "seat time" is not the goal, the final rule allows for equivalent measurement of learning outcomes. It also clarifies that a credit hour is defined solely for federal program purposes, allowing institutions to set their own standards for academic purposes.
    • Written Arrangement: A postsecondary institution is allowed to deliver a portion of another institution's educational program through a written arrangement. Problems have surfaced when the two institutions are controlled by the same entity or do not meet certain participation requirements. The regulation limits the amount of a program that can be provided by a school in an arrangement, prohibits arrangements with ineligible institutions that have had their federal student aid participation revoked, and expands information that an institution must disclose to a student enrolled in a program affected by the arrangement.
    • Retaking Coursework: Currently students who repeat coursework generally cannot have the course they repeat count towards the calculation of a full-time course load in a term-based program if previously passed. The regulations expand the definition of full-time student by allowing such courses to count in most cases for one repetition without regard to whether the student previously passed it.
    • Determining When a Student Has Withdrawn: Currently, loopholes complicate the measure of how much federal funding must be paid back if a student drops out of a program measured in credit hours. The regulations eliminate loopholes and clarify the calculation of returning federal funds to the Department by defining when a student is considered to have withdrawn from a program. It also clarifies the circumstances under which an institution is required to take attendance for the purpose of calculating a return of federal funds.
    • Disbursing Federal Student Aid Funds: As it stands now, many students are not receiving their federal student aid funds in enough time to obtain their books and before the start of school. The regulations ensure that the neediest students -- Pell grant recipients -- can acquire books and supplies by the seventh day of their payment period.
    • Gainful Employment: In order to provide students and families with better information about the value of programs subject to the requirement they lead to gainful employment in recognized occupations, institutions are required to report information about students who start and complete a program. This information includes costs, debt levels, graduation rates, and placement rates.

    Sources:

    http://www.americanprogress.org/issues/2011/02/gainful_employment.html

    http://www.ed.gov/news/press-releases/department-education-establishes-new-student-aid-rules-protect-borrowers-and-tax

    http://www.insidehighered.com/news/2010/10/28/regs

    http://www.insidehighered.com/news/2011/01/24/for_profit_college_group_sues_education_department_over_new_rules

    http://voices.washingtonpost.com/college-inc/2011/02/for-profit_colleges_and_studen.html

    http://www.washingtonpost.com/wp-dyn/content/article/2011/02/04/AR2011020400015.html

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    The Michigan Policy Network is a student-led public education and research program to report and organize news and information about the political process surrounding Michigan state policy issues. It is run out of the Department of Political Science at Michigan State University, with participation by students from the College of Social Science, the College of Communication, and James Madison College. 

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    Meet your Policy Fellow: Andy Chou and Andrew Revard

    Andy Chou and Andrew Revard are Education Policy Correspondents for the Michigan Policy Network. Andy is a first-year student in Economics at Michigan State University. Andrew is a senior in Political Science at MSU.