Pass Without Distinction

In Clinton, Iowa, a 500-capacity football stadium sits on the campus of Ashford University, which sells heavy football sweatshirts emblazoned with the school's logo in its campus store. But don't expect to see cheering fans filling up the bleachers anytime soon. Ninety-nine percent of the college's 78,000 students are online, and there is no Ashford football team. The stadium and gear are just marketing swag, used to make the online university look like a traditional school.

On the numbers, though, Ashford is anything but traditional. It has an 84 percent dropout rate for its two-year associate degree program. Eighty-six percent of its students receive federally backed student loans, but just three years out, 22 percent find themselves in default on them. And Ashford's payback rate is significantly better than the average for-profit college.

After a nearly two-year drafting and revision process, the Department of Education (DOE) has finally begun to crack down on schools like Ashford, whose students are often lured in by flashy advertising and the promise of a lucrative future, then left with little but mounting debt to show for their education. Yesterday, the DOE announced rules requiring career colleges to certify that their graduates are "gainfully employed" in order for their students to qualify for federal aid. What's more, schools will now have to make information about average debt and future earnings widely available in marketing materials.

The rules, which apply to career and vocational programs at for-profit and non-profit colleges, are intended as a quality-control measure for the growing for-profit industry that draws billions from the federal government each year, yet has little accountability. While only about 12 percent of college students attend for-profit institutions, they receive 26 percent of Title IV funds -- which include Pell grants and Stafford loans as well as other financial aid -- and account for a staggering 47 percent of student-loan defaults. In the last decade, for-profit schemes have exploded -- and largely on the government's dime: Between 2000 and 2009, the amount of federal aid going to the for-profits quintupled, to $26.5 billion.

But starting in 2012, schools will have to pass one of three quality-control measures to qualify for federal aid. Career colleges can either show that in a given year, at least 35 percent of their students are repaying some amount (even so much as a dollar) off their loans. Alternatively, they can satisfy federal requirements by showing their graduates' debt-to-income ratio falls below a threshold or that their debt-to-discretionary-income -- their total debt relative to their income spent on non-essentials -- levels fall below a different threshold. If a college fails to meet at least one of the three metrics three times in four years, it will lose eligibility. Practically, this means that no college will be affected until 2015.

Yesterday's ruling is being pitched by DOE officials as a considered, reform-minded effort -- a chance for for-profit colleges to turn things around. But to more hardline reformers, the rules leave a lot to be desired. While the new rules do go after the most egregious offenders in the for-profit industry, they leave the merely bad untouched.

"This rule may stop the worst violators among the predatory for-profit schools but it will not protect thousands of young students who are being burdened with debt by many worthless diploma mills," said Sen. Dick Durbin in a statement yesterday.

First, the requirements don't come into effect until next year. Colleges are given "three strikes" -- one per year -- and they only have to satisfy the requirements three years out of four. There's a large window -- the duration of two two-year degree programs --before a career college could take a hit. "In the end, the 436-page document is little more than an a la carte menu of ways these institutions can game the system," says Jose Cruz, vice-president of Education Trust.

The standards have also been considerably weakened in the last year's review process. Of the three ways a college could demonstrate its graduates were gainfully employed -- the loan repayment rate, the debt-to-income ratio, and the debt-to-discretionary-income ratio -- all three have been reduced to levels previously considered appropriate for issuing a warning. Colleges will not have to change all much to meet these standards. In fact, the Department of Education expects that 98 percent of career programs already meet them.

The rule formulation also has the potential for abuse, too. The requirements are stepped year-to-year in a way that penalties can be easily avoided. If 85 percent of a college's students cannot repay their loans one year, but then 30 percent of them repay them the next, the college will still qualify for funds. Some critics also fear that for-profits will act in collusion with financial planners to place their students in forbearance rather than let them default in order to shift their default to another year, sidestepping the regulations.

At least the rules do try to empower students with information. Last fall, the Department of Education announced that colleges will have to disclose on their websites consumer information about their past graduates, including debt-load, tuition costs, job placement rates and graduation rates. Programs that fall short of federal requirements on any of these will also have to display its failing grade until it improves. And, if the program fails two years in a row, the college needs to warn its current students about their debt and present them with options for transferring.

After nearly two years since the Department of Education started its look into for-profit education, today's rules issue a modest rebuke, moving the goalposts towards effective reform that stops abuse. But if it's any indication of how hard the for-profit education sector is taking it, yesterday the stock of Bridgepoint Education, fake-football-field Ashford's parent company, shot up 3.3 percent.