Education Secretary Betsy DeVos “Resets” Rules On For-Profit Colleges

Education Secretary Betsy DeVos has announced plans to “reset” two regulations that were recently put in place to hold for-profit colleges more accountable and prevent students at these schools from being left with nothing but debt if their college collapses.

The two regulations — the Gainful Employment rule and the Borrower Defense rule — were created during the previous administration amid multiple high-profile for-profit campus closures, and fraud allegations against some of the nation’s largest for-profit educators.

The Gainful Employment rule, which requires that for-profit educators demonstrate their former students are making a living wage after they graduate, has already been enacted. Borrower Defense, which protects students at schools with deceptive practices, had been set to take effect July 1 but has now been delayed.

Today, DeVos revealed her intention to establish rulemaking committees starting a process to “reset” the rules, claiming the Dept. “intends to develop fair, effective and improved regulations to protect individual borrowers from fraud, ensure accountability across institutions of higher education and protect taxpayers.”

According to the Secretary, who called for a “regulatory reset,” the previous rulemaking process “missed an opportunity to get it right,” resulting in a “muddled process that’s unfair to students and schools, and puts taxpayers on the hook for significant costs.”

What DeVos doesn’t mention is that the Gainful Employment rule went through multiple rounds of rulemaking to address the objections raised by the for-profit industry, which has also repeatedly attempted — without success — to challenge this rule through the legal system. She offers no explanation of how another round of rulemaking, which will likely require at least another year or more, will improve the existing regulation.

DeVos also claims that “postsecondary institutions of all types have raised concerns” about the borrower defense rule. However, only the for-profit industry has sued to stop this rule.

When asked which non-profit educators had voiced opposition to the rule, a rep for the Department pointed to the United Negro College Fund, which recently listed repeal of Borrower Defense as a top regulatory priority, despite the fact that none of the UNCF’s 37 member schools are for-profit institutions. We’ve reached out to UNCF for further clarification on its opposition to the rule and will update if we receive a response.

In her statement, the Secretary notes that the current version of the Borrower Defense rules will remain in effect and the Department will continue processing students’ claims for refunds. However, as noted by lawmakers and states attorneys general, refunds stemming from the Borrower Defense process have been delayed.

The Department will conduct public hearings on the rules on July 10 in Washington, D.C., and July 12 in Dallas.

Reaction From Both Sides

Consumer advocates responded quickly to this morning’s announcement, expressed their frustration and calling the renegotiation unnecessary, as the rules have been vetted and were created after years of input and work from industry groups, advocates, students, and other stakeholders.

“These rules were painstakingly negotiated, with input from all sides, to provide some modicum of relief to defrauded students and hold bad for-profit colleges accountable for abuse,” Suzanne Martindale, staff attorney for our colleagues at Consumers Union, tells Consumerist. “It is troubling that the Department would reopen them so quickly. Whatever the outcome of these new rounds of negotiation, it is crucial that the Department maintain sensible standards that protect students and taxpayers from another Corinthian or ITT.”

The National Consumer Law Center echoed these sentiments, adding that the two rules work together to provide important safeguards for students and taxpayers.

“These rules were created through robust negotiation processes,” Persis Yu, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project, said in a statement. “Starting over wastes taxpayer money and creates uncertainty for students who are wondering how to protect themselves from being ripped off by predatory schools.”

Ben Miller, senior director for postsecondary education at Center for American Progress, points out that “Gainful Employment is still a legal regulation on the books and we will be watching closely to ensure the administration follows the law.”

On the other side of the issue, the Career Education Colleges and Universities commended DeVos’ decision today, noting that it will begin conversations to help protect students.

“Our sector has consistently supported this premise. Unfortunately, the Obama Department of Education chose to use this basic concept as a vehicle to continue their ideological assault on our sector’s very existence,” said Steve Gunderson, president and CEO of CECU. “Now we can correct that with a clean Borrower Defense regulation that protects both students from academic fraud and their schools from ideological efforts geared to destroy postsecondary career education.”

Gunderson argues that the current Gainful Employment rule hurts students by defining success in different terms depending on the location of a school.

Consumerist has reached out to attorneys representing the for-profit industry in its ongoing legal challenge to Borrower Defense to see how today’s announcement might influence that lawsuit. We’ve not yet received a response but will update if we do.

And now, for a little rule refresher on these rules:

Gainful Employment

Back in 2011, the Obama Administration began the process of trying to rein in for-profit colleges that benefit from financial aid to students without providing them the education needed to find gainful employment after graduation.

For-profit colleges, which at the time received about 90% of their funding from student aid, have continually come under scrutiny for failing to demonstrate that students could find gainful employment in the fields in which they had been trained.

The schools have been criticized for failing to provide sufficient education and guidance to students who are then stuck without jobs and without the ability to pay back student loans. In fact, a 2012 Dept. of Education report found that more than 1-in-5 for-profit college graduates default on their student loans.

The Gainful Employment rules, first proposed in June 2011, were meant to fix this, but spent years being written, lobbied against, scuttled and rewritten, finalized in Oct. 2014, then repeatedly battled over in court before finally going into effect in July 2015.

The finalized rules [PDF] set standards for career colleges – those schools that offer specialized training programs in recognized occupations – to do a better job of preparing students for gainful employment, or risk losing access to taxpayer-funded federal student aid.

Under the rules, for-profit educators are required to demonstrate that their graduates are actually going on to jobs that can pay the bills.

For-profit colleges are at risk of losing their federal aid should a typical graduate’s annual loan repayments exceed 20% of their discretionary income, or 8% of their total earnings. Discretionary income is defined as above 150% of the poverty line and applies to what can be put towards non-necessities.

So for example, say the typical recent graduate of a career education program earns $25,000. That student would need to average annual student loan payments less than $2,000, or the school would be at risk for losing federal financial aid.

Additionally, institutions must publicly disclose information about the program costs, debt, and performance of their career education programs so that students can make informed decisions.

Borrower Defense

While the Gainful Employment rules aim to ensure college students are getting the education they pay for, the Borrower Defense Rules aim to protect students if their schools fail. The rule, set to take effect July 1, is now on an indefinite hold, according to the Education Department.

The Department of Education revealed plans to overhaul the Borrower Defense rules following the collapse of Corinthian Colleges, the operator of Heald College, Everest University, and WyoTech

The previously seldom-used regulations provide a number of specific benchmarks for situations in which Borrower Defense process would be available to students. The Department’s intention was to draft a new process that would make it easier for students to have their federal loans discharged if the school they attended was found to have used illegal or deceptive tactics to persuade them to borrow funds to finance their education.

The retooled rules were unveiled in June 2016 and finalized in Oct. 2016, aiming to hold schools accountable in a court of law when they screw over students.

The 927-page rule touched on everything from how and when a student should be reimbursed for loans when their school unexpectedly closes to how schools can employ anti-lawsuit arbitration clauses.

Under the rules, schools that want federal aid would be prohibited from using mandatory arbitration clauses that prevent students from filing lawsuits in court and ban class actions altogether. In the education field, forced arbitration is almost exclusively used by for-profit schools. This would allow students to choose arbitration for resolving disputes but they could no longer be forced into giving up their right to sue.

In an effort to add more transparency to the process, schools would also be required to tell the Secretary of Education each time arbitration or judicial claimed were filed against it. Additionally, the schools would have to share information about whatever comes out of those disputes, regardless of whether they happen in the courtroom or in arbitration.

As for students who attend a school that closes, the regulations provide a number of specific benchmarks for situations in which the previously seldom-used Borrower Defense process would be available to students.

For instance, in order for students to be eligible for relief, there would have to have been a breach of contractual promises between the school and the student; a state or federal court would have had to rule against the school regarding the educational services for which the loan was made; and the school would have had to make a “substantial misrepresentation” about the nature of its educational program.

The rules opened the door for the consideration of a group-wide discharge in cases where a school shuts its doors and borrowers’ claims are similar.

Additionally, schools would be monitored for a number of early warning signs of closure or fraudulent activity:
• Lawsuits from a state attorney general, the Federal Trade Commission, or the Consumer Financial Protection Bureau;
• Schools defaulting on their debt obligations;
• A substantial number of Borrower Defense claims brought against the school;
• Schools that receive more than 90% of their revenue from federal aid;
• Schools where more than half of its eligible graduates are not meeting federal Gainful Employment standards;
• The school’s accrediting body takes an action that could result in the loss of accreditation.

The rules have come under pressure recently from the for-profit college industry. Last month, the California Association of Private Postsecondary Schools, a trade group representing for-profit and private colleges in the state, filed a lawsuit [PDF] against the Dept. of Education and Secretary DeVos seeking a court order to stop the planned July 1 implementation of so-called Borrower Defense rules.

Evidence Of Need

Consumer groups noted prior to the Gainful Employment effective date that the rules had already had a positive impact on higher education, propelling many career education programs to disclose e basic information regarding their cost, debt levels, and completion or job placement rates.

Still, a long string of for-profit college closures, investigations, and delayed relief for former students, suggests the Gainful Employment and Borrower Defense rules could work in tandem to protect students. In fact, in just the year since the Borrower Defense proposal was made, the for-profit college industry has seen even more problems (note: this is not a full list):

• July 2016 — Bridgeport Education, the operator of for-profit colleges Ashford University and the University of the Rockies, revealed it was being investigated by the Department of Justice over its federal student aid funding. Two months later, the company was ordered to forgive $23 million in student loans and pay an $8 million penalty over allegedly illegal student lending practices.

• Sept. 2016 — ITT Education Services abruptly closed all 130 locations of its ITT Technical Institute campuses, leading to yet another rash of students seeking borrower defense certification. The for-profit operator had been subject to a number of inquiries in recent years, including a federal fraud investigation and lawsuit from the Consumer Financial Protection Bureau.  

• Sept. 2016 — The Dept. of Education revoked the recognition of troubled for-profit college accreditor The Accrediting Council for Independent Colleges and Schools following increased scrutiny after the collapse of Corinthian Colleges in 2015.

• Sept. 2016 — Lawmakers called for the Department of Veterans Affairs to restrict federal aid from Computer Systems Institute after an investigation found evidence the schools allegedly defrauded students.

• Sept. 2016 — Minnesota-based Regency Beauty Institute announced it would close the doors of its 79 campuses across the country.

• Oct. 2016 — DeVry Education Group was ordered to stop claims in advertisements that 90% of students get jobs after graduation.

• Nov. 2016 — Heritage College and Heritage Institute — which operated 10 campuses around the country focusing on health sciences — closed their doors abruptly.

• Dec. 2016 — DeVry Education Group agreed to pay $100 million to settle federal regulatory charges that it used deceptive ads to recruit students.

• Feb. 2017 — New Attorney General Eric Schneiderman’s office announced a $2.75 million settlement with DeVry University related to the company’s use of deceptive ads to recruit students.

• April 2017 – The AGs from dozens of states sent letters to former students of defunct for-profit college chain Corinthian Colleges reminding them to apply for federal student loan discharges.

• May 2016 – Lawmakers demanded DeVos provide answers about the delay of payment on tens of thousands of student loan discharges that have failed to reach intended students.

• May 2016 – A number of state officials called on DeVos to stop delaying loan forgiveness. The AGs estimated that more than 27,000 students nationwide who had already been approved for loan forgiveness had yet to see their loans discharged.

Was this helpful? We’re a non-profit! You can get more stories like this in our twice weekly ad-free newsletter! Click here to sign up.

(Updated with response from Department of Education about opposition to Borrower Defense from the United Negro College Fund.)