After the U.S. Department of Education announced plans to delay and weaken consumer protections against predatory colleges, TCF Senior Fellow Robert Shireman and Policy Associate Tariq Habash prepared testimony for public hearings. Shireman spoke on July 12 in Dallas, Texas; Habash spoke on July 10 in Washington, D.C.
PREPARED STATEMENT of Robert Shireman, Senior Fellow, The Century Foundation at the U.S. Department of Education, Rulemaking Input on Gainful Employment and Borrower Defense Hearing
July 12, 2017
The Gainful Employment and Borrower Defense rules are well reasoned, well constructed, and should be implemented and enforced as is. The department has been hearing from many commenters about the ways that students have been misled and poorly served by colleges, most of them for-profit. The for-profit companies, meanwhile, have claimed that they are somehow the victims, even though these two regulations apply to public, nonprofit, and for-profit colleges. My input today is about the research the department must do to analyze these claims.
If for-profit schools are more predatory, which I believe they are, there is a logical explanation: school owners’ ability to pocket taxpayer money. For-profit, nonprofit, and public institutions as corporate entities are governed by rules that create very different incentives and resulting behavior. An attempt to change the department’s Title IV regulations so that they affect all sectors equally—which seems to be what the for-profit college industry is demanding—would be a fool’s errand.
Nonprofit Control Can Be a Powerful Regulator
The idea that a nonprofit control structure can, in some contexts, better serve the public interest, is neither controversial nor partisan. President Trump last month emphasized the importance of using a nonprofit organization in his plan to privatize the nation’s air traffic control system, an idea promoted by a libertarian think tank. The White House explained that a nonprofit would be better than for-profit because its leadership would not have a financial interest and would be legally committed only to the organization’s mission, not driven by a profit motive that could distract them from the system’s effectiveness and safety.
At a hearing last month, Secretary DeVos described sector differences as an inconsequential matter of “tax status.” But that’s like saying that the difference between vodka and water is just calories. Just like the alcohol in the vodka makes the drinker act differently, the profit motive—control by owners and investors—affects the behavior of an institution. This table shows how the control structures differ by sector:
|Control Structures: What Do They Mean?
| Privately held
|| Publicly traded
|Who has oversight and control over the college’s pricing and how money is spent?
|| Government agencies and officials control the finances. And ultimately voters do, through elected or appointed regents or trustees.
|| A board of trustees/directors controls the finances.
|| The investor-owners control the finances.
||Investors with voting shares, through elected board members, control the finances. The board and executives are legally required to act in the financial interests of shareholders.
|What are they allowed to spend money on?
||Funds may be used only for the explicit public purposes of the public college, with ultimate accountability to voters.
||Funds may be used only to pursue the college’s educational mission, or other charitable nonprofit purposes.
||Anything. There are no restrictions on how private owners spend school funds
||Shareholders’ financial interests legally prevail, trumping students’ educational interests when there is a conflict.
|Can those in control make decisions that benefit themselves?
||No, conflicts of interest are legally prohibited.
||No, conflicts of interest are legally prohibited.
||Yes, control by those who can gain financially is intrinsic to a proprietary control structure.
|If the school has more revenue than it spends, how can the extra funds be used?
||The extra funds may be used only for public purposes or held for later qualified uses (i.e. an endowment).
||The extra funds may be used only for charitable, educational or religious purposes, or held for later qualified uses (i.e. an endowment).
||There are no restrictions on how net revenue can be used.
|What limits are there on salaries and stock options?
||Stock options are prohibited, and salaries must be justified to legislatures and voters.
||Stock options are prohibited, and salaries must be reasonable and okayed by trustees who do not have a financial interest.
||None. There are no limits on salaries or stock options.
|Who is held accountable if students were poorly treated but the institution has no money to compensate them?
||Taxpayers, as the owners of the schools, compensate the victims (public schools are backed by the full faith and credit of the state).
||No one is held accountable. though large liabilities are not common at nonprofits because the board and executives are prohibited from taking assets for themselves.
||No one is held accountable: corporate boards, shareholders, and executives can usually avoid liability, regardless of their financial gains from running the school.
If nonprofit and public institutions are less inclined toward predatory behavior, it is because of the regulations in their underlying control structures:
- Prohibitions of conflicts of interest: At public and nonprofit institutions, those in control are prohibited from making decisions that benefit themselves financially; they are legally forbidden from diverting assets to private gain (known as private inurement).
- Restrictions on the use of funds: Nonprofit funds can be used only to pursue the college’s educational mission or other charitable nonprofit purposes. At public institutions, funds may be used only for the explicit public purposes of the colleges, with ultimate accountability to voters.
- Limitations on salaries and stock options: Stock options are prohibited at public and nonprofit institutions. Salaries at nonprofits must be reasonable and okayed by trustees who do not have a financial interest themselves. At public institutions, salaries must be justified to legislatures and voters.
- Accountability to taxpayers: Taxpayers are ultimately on the hook for any misbehavior by public institutions.
Nonprofit and public institutions, in other words, are far more regulated in their control structures than are for-profits. Therefore, to judge the industry’s argument that for-profit entities are somehow being treated unfairly under Title IV of the Higher Education Act, the department cannot simply look at how regulations target or differentially effect for-profits.
A Research Agenda for the Department
In this regulatory process the department should examine, by sector, the incidence of a variety of behaviors that hurt taxpayers and consumers, including:
- Recruiting almost exclusively students likely eligible for federal aid, to avoid the accountability that comes from serving employers and students who can pay.
- Paying high prices to identify these leads to be recruited.
- Charging low-income students a net tuition price (after institutional aid) that require them to borrow the maximum available federal loan.
- Charging far more in tuition than is spent on instruction.
- Spending revenue on recruiting, marketing and advertising when investments are needed in improving instruction.
- Failing to encourage prospective students to shop around or discouraging them from shopping around.
- Encouraging prospective students to rush into a decision to enroll.
- Making false claims in advertising and recruiting.
- Lobbying to weaken restrictions on paying bounties to recruiters.
- Making advertising and recruiting claims that are sleazy if not illegal, such as emotionally connecting with a recruit and implying that enrolling in school will solve the prospect’s problems or lead to the dream job.
- Denying students their rights to complain, to sue, or to join with fellow students to file grievances.
- Enrolling students who are unqualified, or who do not understand what they are getting into.
- Setting low academic expectations.
- Closing with little notice, leaving students in the lurch and taxpayers on the hook.
If the department finds that there are patterns of behavioral differences by sector, then the likely explanation—which the department should examine—is that the differences are caused by the control structure, since the behaviors listed above are not required or restricted differentially in Title IV based on sector. In that case, it is logical and appropriate for a Title IV regulation to have a differential effect, or treat , for-profit institutions differently.
The Long History of Problems With Federally-Funded For-Profit Schools
Ever since the Post-World War II GI Bill, every time that the federal government has opened up voucher-type financial support to for-profit colleges, there have been scandals and a need for additional regulations, usually imposed on all sectors. Some public and nonprofit institutions then join with for-profits to weaken regulations, which causes the problems to return. I am attaching for the record a series of papers covering the history, published by The Century Foundation:
The department should be mindful of the lessons of history in its rulemaking.
PREPARED STATEMENT of Tariq Habash, Policy Associate, The Century Foundation at the U.S. Department of Education, Rulemaking Input on Gainful Employment and Borrower Defense Hearing
July 10, 2017
Thank you for the opportunity to provide input into the department’s announced intention to open up new negotiated rulemaking sessions concerning the gainful employment and borrower defense regulations.
Last year at The Century Foundation (TCF), we conducted research into the contracts that colleges require students to sign when they enroll. We identified four kinds of clauses that were clearly designed to make it difficult for students to pursue complaints, or to prevent public disclosure of the disputes.
- We found forced arbitration clauses that prevent students and former students from going to court.
- We found clauses that prevented students from teaming up with others who have similar complaints.
- We found gag clauses that prohibit students from telling other people about the complaint-resolution process, or about the specifics of any final ruling.
- And we found clauses that forced complaints to stay internal to the school.
While the clauses themselves were disturbing, as they so clearly impinge on the rights of students, what was perhaps most interesting about our findings was that the clauses were being used almost exclusively by for-profit colleges.
Last year the department addressed some of these clauses in the Borrower Defense regulations. Now the department has delayed and may repeal those changes. One driving factor seems to be the for-profit colleges’ claims that the rules are “unfair” to them.
If denying students’ rights is somehow inherent to being a for-profit, then the disparate impact of a ban on forced arbitration might be evidence of unfairness. But we found many for-profit colleges that do not use forced arbitration. In fact, it is only colleges that use federal aid that are using these restrictive clauses. So denying students’ rights seems to be a strategy designed to scam more money from taxpayers in particular.
Some industry leaders like DeVry University have voluntarily removed forced arbitration clauses from their enrollment contracts, and others should follow suit. But without action by the department, investor pressure will push for-profit colleges in the other direction, seeking to extract as much money from students and taxpayers as possible, by preventing students from pursuing their complaints and keeping information from the government until it is too late, as in the cases of Corinthian and ITT Tech.
The industry’s claim of unfairness is a cynical ruse. Unfair is what has happened to students and taxpayers in the absence of the Borrower Defense and Gainful Employment regulations. Therefore, the department should implement and enforce them in their current form.