In support of taxpayers on student loan defaults

This is an archive copy of the original post on Please comment on the Chron site if you wish to comment (encouraged!)

I wrote about student loans and bankruptcy earlier this year in “Bankruptcy and the Unforgiving Servants” on the Chron blog. Today via a facebook link, I was pointed to this protest on the Higher Ed Action Center site on behalf of The Art Institutes. The statement reads:

The U.S. Department of Education intends to issue a rule (Program Integrity; Gainful Employment) that would limit educational and economic opportunities for millions of Americans. Its proposed “Gainful Employment” regulation would make entire programs ineligible for Title IV federal student financial aid if they fail to meet a one-size-fits-all metric test that has little to do with academic quality. While student debt is a shared concern, the proposed rule is an inappropriate response to a complex problem and will limit choices and educational access for students, while threatening critical jobs across the country.

Our company employs numerous Art Institute of Houston graduates and they have proven to be reliable and capable employees. In other words, my experience has been “the product is good.” So I was taken aback to see their protest against the Gainful Employment Rule. I didn’t understand. Which made me curious.

And they aren’t the only ones commenting, Devry, University of Phoenix, Kaplan are too – and their stock prices are dropping. Senator Durbin in the Chronicle is quoted as:

Senator Durbin grilled the chief executive of the Career Education Corporation about the morality of charging $40,000 for culinary programs that prepare students for $10-an-hour jobs, calling the programs a “federally subsidized rip-off.” He also confronted the president of Kaplan University and the chief executive of DeVry Inc. about their students’ low loan-repayment rates.

So what does this rule say? A few excerpts from on the gainful employment proposed rule:

“There are 18 title IV, HEA loan defaults for every 100 graduates of for-profit institutions, compared to only 5 title IV, HEA loan defaults for every 100 graduates of public institutions.” – line 336

“the Department would assess whether a program provides training that leads to gainful employment by applying two tests: One test based upon debt-to-income ratios and the other test based upon repayment rates. Based on the program’s performance under these tests, the program may be eligible, have restricted eligibility, or be ineligible.” – line 348

“Programs whose former students have a loan repayment of at least 45 percent will continue to be eligible. Programs whose former students have loan repayment rates below 45 percent but at least 35 percent may be placed on restricted status. Programs whose former students have loan repayment rates below 35 percent may become ineligible.” – line 400

The proposed rule in no way limits what you can offer or sell to students. Nor does it regulate higher education any further. It simply says “hey, the taxpayer can’t pay for it if 65% (100-65=35%) of your students fail to pay the money back to us.” I seem to recall 70 being the cut off for a passing grade when I was in school, not 35.

It seems a bit embarassing to protest against a rule than seeks a mere 35% repayment rate. Why risk the PR backlash by speaking out? It turns out because the stakes are quite high. Again from the proposed Gainful Employment rule.

“In 2009, the five largest for-profit institutions received 77 percent of their revenues from the Federal student aid programs.” – line 308

Thus if you believe in the slippery slope fallacy, you would not want ANY performance standards in place as it is much easier to change the rate than pass a new regulation. Fair enough.

I am not unsympathetic to students needing loans. Quite the opposite – I have three kids to put through college! I was equally disappointed by our Governor’s deregulation of higher education which put a degree from UT or A&M (side note: Whooop!) out of reach for so many. From the article:

Tuition at Texas universities rose 58 percent between 2003, when schools were first allowed to set their own rates, and 2007. Student fees have gone up, too.

58% increase in 5 years might even beat out the health insurance companies on the zero-to-evil scale.  In fact higher education deregulation in Texas resulted in the death of the Texas Tomorrow Fund, a prepaid tuition program. Wikipedia says “Due to rising costs after state tuition was deregulated in 2003, the program stopped accepting new participants.”

Proposed solutions:

First, for the Art Institute; the lady doth protest too much, methinks. You guys have a great product, let the facts stand for themselves and let those in the bottom 35% run point. If a school falls into that category, they should raise an endowment and “self insure”, but not on the taxpayers’ dime. Common sense says if anything, the threshold of the proposed regulation is too low. (or lobby to change BAPCPA)

Second, require a free money management course in college for anyone getting a student loan. Perhaps something like Dave Ramsey’s (my young employees tell me all the cool-kids are doing it). Explain to students that they WILL have to pay it back, so don’t borrow what they can’t afford. Similarly college financial aid departments should decline students who can’t afford it.

Third, stop telling everyone to go to college. At some point we have to make something. You either dig up a mineral or make something to create a product to export. If you want to correct the trade imbalance, it won’t happen unless you get or make something. THESE people are the engine of our economy and they are sacred. That is a blog post for another day.

Fourth, drastically increase the 4 year degrees available from community colleges like they have done in Florida. We have the infrastructure in place and the cost containment measures in place to solve the higher education access and affordability problem without the 75% default rate. Additionally community college professors tend to be adjuncts, don’t rely on tenure and frequently have real world experience. In other words they are reality based and good!


Question 1) I am not a big fan of government in general, but government is necessary and the gainful employment rule seems like a reasonable rule given taxpayer dollars are involved. Without the money? Do your thing. But if you want the money, yes, some strings are attached. Agree?

Question 2) Why not more 4 year degrees from Texas community colleges? Any reason beyond “the Universities don’t want them to“?


These are my personal thoughts and opinions and do not reflect those of the chron, the company, HCC (I serve on a community advisory board but they don’t know about this post. So perhaps I’ll get kicked off soon.) or any other affiliations as mentioned on my cv.