President Obama takes on the student debt bomb; meanwhile, the Gainf...

Prospects do not look good for President Obama’s vastly ambitious initiative (not yet really a plan) to take on growing college debt.

Consider that the U.S. Department of Education (DOE) is going into its fifth year, and counting, of efforts to regulate just one higher education sector, for-profit schools, to stop those with the worst record of imposing unmanageable debt from continuing to live on a federal dole.  After a big setback in a legal challenge by the industry last year to a new Gainful Employment Rule, DOE has recently resumed its efforts, with a second round of negotiated rulemaking set to begin in September. 

The for-profit industry itself has argued for an expansion of regulatory scope to all colleges, presumably not because that would lead to quicker controls on their own operations.  The Obama administration may have lost necessary focus.  It should be taking on worst things first rather than subjecting even the most efficient, debt-free sectors of higher education to expensive new regulation.

About half of U.S. undergraduates go to community colleges.  As of 2011-12, according to the College Board, the average annual published tuition at public two-year schools was $2,963 (sticker price), and after taking into account grant aid and tax benefits, the average student paid nothing for tuition and fees (actually on average they got $810 more in aid than tuition and fees, meaning some money for living expenses).   In the most recent figures available on debt (probably eroding because of public funding cuts leading to higher tuition), 62% of two-year public school graduates incurred no debt, and only 5% finished school with more than $20,000 in debt.  Most of the students at community colleges pay as they go by working their way through school. These schools need continued public funding to preserve their largely debt-free culture, which also makes not finishing school a low risk to students’ financial futures.  President Obama’s new rating system for all of higher education would not address the problems in this all-important sector, which offers subsidized education that only costs as much per student as high school.

For-profit schools, which have grown to enroll about 10% of college students, are at the other end of the debt spectrum—their students incur the most debt and have the highest default and delinquency rates (while the schools pay the least for actual education as opposed to marketing and other administrative costs).  For an exposition of the for-profit schools' business model, including heavy dependence on federal funds, see my paper from last year; it also provides a comparison to the debt picture at public and non-profit institutions as well as an account of the regulatory process through spring of 2012). 

It is good news that DOE hasn’t given up on regulating for-profits better despite a loss, discussed more below, in federal district court last June.   That decision actually provides a roadmap for redoing the Gainful Employment Rule (GER) to pass legal muster, while making it tougher than the very weak regulation that was struck down.

The GER regulatory process began in September 2009, with a notice of a first round of negotiated rulemaking.  When consensus was not achieved in negotiations, DOE proposed one version of a GER and then received 90,000 comments, 75% of them negative, leading it to publish a watered-down and simplified final rule after a huge lobbying campaign.  (Imagine the number of comments on any legal rule for all colleges!)   A for-profit trade association then sued to stop the rule from going into effect and won in Association of Private Colleges and Universities v. Duncan.

The agency decided not to appeal the federal  trial court decision, presumably based on the risk it faced in the U.S. Court of Appeals for the D.C. Circuit, especially after a loss below.

In the decision in U.S. District Court in DC, Judge Rudolph Contreras, an Obama appointee, found that DOE had authority under the Higher Education Act to use debt measures for eligibility for federal grant and loan funds by programs, mostly at for-profit schools, subject to the statute's requirement that they “prepare students for gainful employment in a recognized occupation.”  He also upheld as reasonable, because based on industry practice and expert opinion, a test that the typical (measured either by either average or median) annual debt payment of program completers could not exceed a maximum debt repayment to income (DTI) test of 12% of annual earnings or 30% of discretionary income.

However, the judge found arbitrary and capricious an additional test that at least 35% of former students be repaying something on principal—reasoning that DOE could just as easily have picked 10% or 50% and that picking a compromise figure isn’t a sufficiently rational explanation.  Under the GER that the decision blocked, a program that passed either the DTI or repayment test for three out of four years would have remained eligible for federal student aid funds.  Because the two tests were intertwined, the judge said he could not find an agency intent to make them severable.  (And he didn’t seem to consider the point that because the 35%-of-former-students-repaying-something test was an alternative way to remain eligible for federal funds, it operated only to ameliorate a DTI rule he had found justified.)

Since the DTI income test was upheld, DOE could ultimately try using just that test. Furthermore, it could go back to the actual industry/expert figures of no more than 8% of annual earnings or 20% of discretionary income going to student loan repayment, figures that DOE increased by 50% ( to 12% and 30%, respectively) to make them more forgiving to the industry.

A remaining controversy is a privacy concern with harvesting income information on graduates from Social Security or other federal data in order to compare it to average or median annual student loan payments.  This concern would only be magnified by a system that gathered this information on all college graduates.  Accurate data collection of other information for a rating/eligility system for all of higher education would also be challenging.

President Obama envisions federal legislation to implement student aid fund eligibility requirements for all colleges.  The difficulty can hardly be imagined of designing
a reasonable system to operate across the diverse sectors of higher education, from the Ivy League and elite small colleges to huge public universities to community colleges to regional nonprofits as well as for-profit schools.  Attempting to regulate for-profits, the most overindebted sector and without the need for Congress to act, couldn’t be accomplished in four years, so don’t hold your breath for the administration and Congress to work out the details of a new federal student aid eligibility system for all colleges.