House Republicans propose to open floodgates to federal funding of low-quality for-profit, online degrees (Michael Simkovic)

House Republicans recently proposed to increase federal funding for the worst performing parts of higher education and reduce federal funding for the best performing parts.

For-profit ("proprietary") brick-and-mortar and online educational programs tend to have low rates of student completion, relatively poor employment outcomes, and relatively high student loan default rates compared to private non-profit and public institutions.  For-profits' typically poor outcomes may be at least in part because for-profit programs typically spend far more on sales and marketing than traditional non-profit programs.  This leaves fewer resources available for instruction and support services for students, or research that can help build an institutional reputation and connections with employers.  Paying profits out to investors also drains cash and limits how much can be spent on instruction in any given year.*  Short-term programs at for-profits are the only category of higher educational institution that have been shown by peer reviewed research to increase their prices without increasing educational quality upon gaining eligibility for federal aid.

Default rates of for-profit programs used to be even worse in relative terms, before rules were implemented to deny eligibility for federal student loans to the worst performing for-profit institutions.

A new House bill sponsored exclusively by Republicans, H.R. 4508,** threatens to open the floodgates to federal funding for for-profit and online education of dubious quality.  According to the CBO, the bill would:

"Amend or repeal restrictions on institutional eligibility for federal student aid for certain types of schools, the largest of which would repeal the definition of distance education and eliminate the cap on the percentage of revenues that proprietary schools can receive from the Department of Education. . . .

Distance Education. H.R. 4508 would repeal the current-law requirement that online programs provide students with regular, substantive interaction with faculty. CBO expects that if programs do not need to meet that criterion they could more easily expand and scale up, resulting in higher enrollment. . . .

Short-Term Programs. Current law requires programs to offer at least 600 clock hours of instruction for students to be eligible for Pell grants. To be eligible for student loans, a program must offer at least 300 hours and have a student completion and placement rate of at least 70 percent. . . . H.R. 4508 would extend aid eligibility to students in short-term programs [and] there would no longer be any requirements about placement rates. . . .

Gainful Employment. In October 2014, the Department of Education published final rules related to gainful employment, setting benchmarks related to student income and federal loan debt that had to be met by programs at proprietary institutions...H.R. 4508 would repeal . . . gainful employment [rules]."

Indeed, it will be much easier to expand enrollment without the need to spend any money providing students "regular, substantive interaction with faculty," who can answer student questions, connect them with employers, or teach them.  

H.R. 4508 gets worse.  The bill would cap the amount that can be borrowed under federal student loan programs that finance high-quality programs, such as 4-year institutions and graduate and professional degree programs and increase the cost and risk for borrowers under these programs.  These programs have among the lowest default rates and are among the most profitable in the federal government's portfolio, even after taking into account student loan forgiveness programs. 

The Republican bill would penalize programs with low repayment rates in early years, which is typical of some extremely high-quality programs whose graduates typically see their earnings start low and then grow rapidly.  Graduates of these programs should be encouraged to use a slower repayment schedule.  Consider graduates of medical school working in residency or graduates of law school working in clerkships before more lucrative pursuits.  Law graduates and other professional degree holders typically see their incomes start at relatively modest levels and then grow rapidly for decades.  Education is about outcomes over 30 or 40 years, not 2 or 3.

There are problems with the way the old rules evaluated outcomes and limited eligibility for student loans.  The rules focused on absolute outcomes rather than value-added.  The rules did not adequately take into account student characteristics or prevailing economic conditions.  These problems should be addressed, and the rules amended.  But scrapping the rules completely and flooding the market with low quality educational programs--or replacing them with rules that make even less sense--is not in students' or taxpayers' interest.

* Poor outcomes could also be due in part to differences in student populations, and at least some for-profit programs might perform well.  The gap in performance is largest for 4-year+ programs.

**The bill has been given the rather Orwellian title "Promoting Real Opportunity, Success, and Prosperity through Education Reform Act."