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How Can We Regulate For-Profit Colleges If We Keep Giving Them Our Credit Card?

Mark Huelsman

Not only has the government been unable to properly force these institutions to account for their behavior, but it has been unable to stop providing the majority of money that keeps them going in the first place.

1.)  Yesterday, after some dogged journalistic legwork by Inside Higher Ed’s Michael Stratford, the Department of Education released a list of 560 colleges that have been placed under a level of extra scrutiny– known as “Heightened Cash Monitoring”—due to concerns about a college’s finances or administrative capacity, or as the result of an audit, or simply because a college didn’t comply with various federal reporting requirements. Under this extra scrutiny, colleges basically have to account for the federal dollars they receive, and can even have their reimbursements from the federal government delayed while regulators ensure they are being responsible with the public dime. 

2.)  Around half of the colleges under scrutiny are in the for-profit sector (despite the fact that for-profits enroll around 1 in 10 college students). According to the list, there are currently 69 colleges1  subject to the highest level of scrutiny by the Department. More than half of these colleges are for-profit.

3.) Also yesterday, a collective of students from the infamous Corinthian Colleges met with regulators from the Consumer Financial Protection Bureau and the Department of Education to discuss loan forgiveness for students who were roundly duped and taken advantage of by a college that has been sued by CFPB and multiple state attorneys general, investigated by the SEC, and forced to sell off many of its campuses in a deal brokered by the Department of ED. Originally known as the “Corinthian 15” before their group ballooned to include 100 current and former students, the collective is also seeking mass forgiveness of all federal loans taken out to attend Corinthian Colleges.2

Federal student loans made up the vast majority of debt taken on by Corinthian’s—and pretty much every other institution’s—students.

4.) Corinthian Colleges was able to remain fully operational—and keep admitting students—until the Department turned up the proverbial heat via Heightened Cash Monitoring late last year, and withheld reimbursing Corinthian with federal dollars for 21 days while the Department could get to the bottom of missed reporting deadlines.

5.) As luck would have it, New America’s Stephen Burd also had a piece yesterday discussing the Department of Education’s enforcement of a 1992 law (and additional 2010 protections by the Obama Administration in response to Bush-era regulatory relaxation) banning colleges from providing incentive compensation to recruiters and admissions officers based on the number of students they convince to enroll and take federal financial aid. The rule was designed in part to prevent for-profit colleges from aggressively recruiting students with sales pitches that would line the pockets of recruiters once the student paid tuition and, in most cases, took on federal student loans.

In other words, the regulations are designed to ensure that colleges aren’t providing rewards to employees by the number of federal dollars that flow directly to the institution as a result of enrolling more students. Previously, if colleges were found to be violating the ban, the Department of Education could recoup some of the federal funds that were disbursed at the offending institutions.

Though according to Burd (reporting on the findings of the Department’s Inspector General issued last week), the Obama Administration hasn’t gotten around to using the additional teeth it included in the regulations, after they were watered down by the Bush Administration.

6.) A 2012 Senate Report found that the 15 largest for-profit colleges receive 86% of their funding from the federal government.



In most discussions about regulation, there tends to be a push-and-pull between those arguing that federal oversight gets in the way of doing good business and those arguing that oversight is necessary to root out malfeasance, fraud, and general plundering of the public dollar. These debates often presume that the markets being policed are generally otherwise free of public interference or investment.

This is almost always incorrect, but it’s really incorrect when we’re talking about for-profit colleges. In the case of for-profits, not only has the government been unable to properly force institutions to account for their behavior, but it has been unable to stop providing the majority of money that keeps these colleges standing in the first place.

Let’s step back. For-profit colleges often operate as traditional businesses with educational offerings. Some have grown so big as to be publicly-traded entities. The key to their success, though, has been twofold:

First, our higher education system is entirely voucherized. A student who wants to go to college can fill out the Free Application for Federal Student Aid (FAFSA), and if he or she receives funding in the form of Pell Grants, Subsidized or Unsubsidized Loans, Federal Work Study, or other programs – not to mention GI Bill and Veterans Benefits—that funding can be taken to any institution deemed acceptable by the Department of Education. Due to meeting various accreditation, financial, and other requirements, there are currently 3,551 for-profit institutions3  who can participate in federal financial aid programs (about ¾ of them are two-year or less-than-two-year colleges).

Second, the federal government has been unable (or in some eras, unwilling) to come up with appropriate accountability measures that would seriously put colleges in jeopardy. The main accountability measure—measuring Cohort Default Rates—is pretty lenient. Colleges are generally fine as long as fewer than 30 percent of student borrowers default on their loans (which results from making no payments for nine months) within three years of leaving school—for three years in a row.4  To pull that out a bit – because it truly is amazing—a school can stay on the federal gravy train if it has at least one year in a three year period where more than 7-in-10 borrowers make a payment on their student loans every nine months, for three years. Beyond that, there are few, if any, consequences.5

To its credit, the Obama Administration has tried multiple times to institute Gainful Employment regulations that would attempt to ensure that career-focused college programs are not abusing federal tax dollars and loading students with debt that they cannot reasonably repay. But these regulations are tied up in court, and there’s nothing stopping future administrations from simply ignoring them or reversing them.

But something has to give. While we don’t have all the specifics, we know that 69 colleges are on high alert for failing to comply with rules set by the entity that provides them with a substantial amount—in most cases, the majority of their funding. Any one of these colleges could be the next Corinthian—a cash-poor business reliant enough on federal money that withholding it for even a little bit could lead to the collapse of the college itself.

Meanwhile, students attending the worst of these colleges are becoming wise to a game that was rigged against them—a game funded primarily with government support. That these students are willing to strike and refuse to repay their loans means that future generations of students are going to want recompense from failing colleges and the government that enables them.

By potentially forgiving student debt—and to be certain, these students were victimized and sold false promises in return for tens of thousands of loan dollars—the federal government would be admitting, perhaps for the first time, that it has been partially complicit in a predatory lending scheme. Like the parents who finally take away the credit card from a spendthrift teenager, perhaps its time to make sure it has the tools, and disposition, to do something about it.

  • 1The Department did not release the names of 21 of the colleges, due to ongoing federal investigations.
  • 2These students and their peers received some debt relief from loans that were issued and sold by the college themselves.
  • 3According to the Integrated Postsecondary Education Data System. This number includes all branches—for example, the University of Phoenix Philadelphia Campus and the University of Phoenix Cincinnati campus are counted as separate institutions.
  • 4Schools can also be sanctioned if their 3-year default rate exceeds 40% in a given year.
  • 5Colleges can also find themselves in trouble if they fail to comply with Title IX, or fail to meet the Department's reporting requirements (on graduation rates, for example).