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Compromises tend to please nobody:  Critics of for-profit higher education say the Education Department’s “gainful employment” rule, announced yesterday,  is too weak, while the industry complains it unfairly cuts off access to student loans.

Under the new regulation (pdf), career training programs will have to show that  at least 35 percent of former students are repaying their loans (reducing the loan balance by at least $1 a year) or that the typical graduate’s annual loan payment does not exceed 30 percent of discretionary income or that the typical grad’s payment does not exceed 12 percent of total earnings.

“We’re asking companies that get up to 90 percent of their profits from taxpayer dollars to be at least 35 percent effective,” Education Secretary Arne Duncan said.

Career colleges will get more time to comply: Those that miss the targets in the first year must report the data and write an improvement plan. After two years, they must warn students of high debt to earnings ratios. Only after three years would a program lose access to student aid.

For-profit education companies’ stock prices soared when the regulations were announced. That suggests the career colleges will be able to adapt without much pain. Some already are requiring new students to go through an orientation designed to screen out the unprepared and unmotivated. Others may lower tuition to improve students’ ability to repay loans.

Industry spokesmen still claim only Congress has the authority to limit access to student loans. In February, a bipartisan group in Congress voted to block the regulation, but the compromise may persuade legislators to let the Education Department set loan rules.

The original version of the rule called for a 45 percent repayment rate, “a debt-to-discretionary-income ratio of 20 percent or a debt-to-income ratio of 8 percent,” notes Inside Higher Ed.  Colleges faced an immediate eligibility cut-off.  The regulation included an intermediate “restricted” status that would have required colleges to cap enrollment and warn students of high debt levels.

In the final regulations, the restricted status has been eliminated and replaced with the “three strikes” rule, which department officials say is closer to its policies in other areas, such as on student loan default rates. Colleges would have to fail to meet each of the criteria for three years out of four. In the meantime, they would not face enrollment caps, though they would still have to tell students the first year that they missed the target and warn them about the program’s status after the second.

. . . Students have been allotted a longer time to pay off loans, so that the annual debt burden is lower: a 10-year term remains in place for certificate or associate degree programs, but bachelor’s and master’s degree candidates would have 15 years to pay off their loans, and other graduates would have 20.

Students’ default rates will be measured three and four years out of college, instead of starting in the first year, and those in government repayment programs won’t be counted as defaulters, even if they’re only repaying the interest on the loan.

Only 5 percent of the for-profit programs covered by the rules, and 1 percent of the public and nonprofit career programs would lose eligibility for  student aid, Education Department officials estimated.

Only the worst 1 percent will be cut off by 2015, predicts the Center for American Progress.

The final rule also gives the poorest-performing education programs significant time to comply with the rule in addition to eliminating the restrictions on dubious-but-not-ineligible programs. Colleges that fail to meet the metrics can continue to operate for three years without losing federal funds and without any cap on enrollment growth.

Education Trust called the compromise a “disappointment.”

Sen. Tom Harkin, the Iowa Democrat who’s lambasted the industry in a series of Health, Education, Labor and Pensions Committee hearings, called the regulations a “modest and important first step.”

Republicans John Kline of Minnesota, House Education and the Workforce chair, and Virginia Foxx of North Carolina, who chairs the subcommittee on Higher Education and Workforce Training, said the rule is a step in the wrong direction. “This punitive regulation piles more burdensome red tape” on career colleges, Foxx said. “The increasingly fragile economic recovery simply cannot afford another job-destroying federal regulation.”

One of the few who unreservedly likes the compromise (pdf) is Mark Kantrowitz of, who calls the final rule “a reasonable, thoughtful and responsive approach.”

If this rule is a first step, as many critics of career colleges called it, then what’s the next step?  Once the Education Department starts analyzing student outcomes, it could take a close look at community colleges, which have very low completion rates compared to for-profits’ two-year career programs. The three-year graduation rate is 58 percent at for-profit two-year programs compared to 21 percent at community colleges, according to the new Condition of Education report.

Of course, community colleges don’t have a significant loan default problem because tuition is heavily subsidized by local and state taxpayers: Few community college students need to take out student loans, though many more get Pell Grants. But community colleges are raising tuition to balance budgets, making it more likely students will need loans. And Pell Grants are under close scrutiny by budget cutters, who see costs exploding while graduation rates remain low.

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