Two steps forward, one step back

The race to regulate (and de-regulate) the industry

At the national level, the cycle of access and fraud began decades ago with one of the American education system’s high points: the passage of the Servicemen’s Readjustment Act of 1944, popularly known as the GI Bill, which made federal funds available for higher education. Both the non-profit and for-profit sectors saw a sharp increase in attendance in the immediate postwar years. The bill was also the cause of the for-profit education industry’s first national scandal.

With new access to federal subsidies, the for-profit industry enrolled nearly 1.7 million veterans under the GI Bill. A 1950 federal investigation found that nearly two-thirds of the 8,900 for-profit schools that received GI Bill funding had been established after the $14 billion bill’s passage. The New York Times wrote that many of the schools were “simply living off ‘the fat of the land’ and will cease operations when the veteran enrollment ends.” A congressional investigation found that some of the for-profit schools had falsified cost and attendance information and billed the government for students who had never enrolled. Congress voted to increase oversight of the for-profit sector.

So began what would become the de facto model of federal regulation of for-profit colleges: an ebb and flow of oversight as the government loosens regulations to make higher education more accessible, some schools abuse this laxity and the government responds with new regulations.

Regulations passed in the 1950s could not prevent further abuse after Congress passed the 1972 Higher Education Act Amendment. Also known as the Student Aid Bill, it extended access to federal grants and tuition subsidies to students enrolled in higher education programs. The amendment also created the Student Loan Marketing Association, widely known as Sallie Mae, to provide federally insured higher education student loans.

The amendment extended equal access to federal subsidies to students at non-profit and for-profit institutions – but not without objections. One report said that “students attracted by sophisticated advertising and unfillable promises may enroll in schools which do not offer the quality of education which the schools claim is available.”

As with the GI Bill, this access to new federal subsidies once again led to abuses and fraud in the for-profit college sector.

In 1976 the Federal Trade Commission concluded an extensive investigation into reported abuses at for-profit schools. The Commission’s 600-page final report concluded that the for-profit college system engaged in “false, deceptive, and unfair acts and practices that have been and are causing serious harm to consumers,” and that if the industry was left unchecked fraud would continue.

The report’s recommendations for reform would have gone into effect four years later, but a group of for-profit schools successfully challenged the FTC in court and prevented the rule from being enacted.

In New York State, for-profit schools faced civil penalties and the repayment of state grants and, in the most extreme cases, imprisonment. In 1979, the president of Careerco School for Paraprofessionals received a four-year prison sentence for mail fraud and conspiracy charges, including faking student records to prevent refunds for uncompleted courses. The school folded due to bankruptcy, with more than $1.6 million in unpaid debt.

In the late 1980s and 1990s, skyrocketing student loan default rates prompted another round of federal action against for-profit schools. A 1989 report by the U.S. General Accounting Office found that the amount of student loans defaulted on increased from $14 million in 1987 to $247 million in 1989 for all students. In 1987, students at for-profit schools accounted for 12 percent of all defaults. By 1989, that figure had risen to 86 percent.

Measuring the cost

An education at a for-profit school tends to cost more than similar offerings at community colleges. What could the cost of a two-year degree buy you?

Average loan
x 2 years
which could also buy
12 months of rent in NYC
17 months of rent in NYC
10 months of NYC rent
Sources: Cost is reported total price for in-district students living off campus (with family) for the 2013-14 school year, via the Institute of Educational Sciences National Center for Education Statistics database (IPEDS); Average loan is the average amount of student loan aid received by full-time first-time undergrads for a certificate or degree in 2012-13 via IPEDS; Interest payments assumes 6.8 percent interest and 1 percent loan feeds over 10 years.

Congress responded with The Omnibus Budget Reconciliation Act of 1990, which denied a school access to the federal loan program if it had “unacceptably high default rates” for three consecutive years. That rate was set at 35 percent for fiscal 1991 and 1992, and would drop to 30 percent in ensuing years. The 1992 Higher Education Act reauthorization lowered the threshold even further to 25 percent. In 1990 when the national default rate peaked at 22 percent for all students, the default rate at for-profit schools was 41 percent.

The 1992 Higher Education Act reauthorization also created stricter regulations for for-profit schools and instituted the “85/15 rule” in an attempt to stem abuse. Under this requirement, schools would not be able to receive more than 85 percent of their revenue from federal student aid.

Once again, the for-profit industry responded to increased regulation with lawsuits. Lawsuits filed by the Career College Association, a lobbying organization that represented 1,300 trade schools, charged that increased regulations would “inadvertently cause good schools to close their doors to the detriment of the students and the school owners.”

These attempts to stop regulation were not successful but the 85/15 rule was later modified by the 1998 Higher Education Act Amendments. These amendments set the 90/10 rule for proprietary schools, which set a maximum of 90 percent revenue to come from federal student aid.

But even this has not been enough to change the industry, and enrollment has grown exponentially in the last four decades. The for-profit college industry has become a big business with some schools engaging in what Harvard researchers have called “highly aggressive and even borderline fraudulent recruiting techniques.”