Department of Education Proposes New Student Aid Rules

President Obama with Ed Secretary Arne Duncan

President Barack Obama with Education Secretary Arne Duncan

Back in March, the Obama administration pushed through several major changes to federal student aid in conjunction with the healthcare bill that was passed in reconciliation. But that was only one piece of the federal government's push to overhaul higher education funding and hold postsecondary institutions fiscally accountable to the public.

For the past year, the administration has engaged the higher education community in discourse around recruiting practices and the correct use of federal funds. The goal of the process has been to strengthen federal and state oversight, increase college access and 'ensure that all Americans get the education and training needed to find meaningful and rewarding work.' As Education Secretary Arne Duncan notes, it's necessary for the feds to work alongside college and universities if they have any hope of reaching the ambitious goals that Obama has set for educational attainment in the U.S. But schools, in turn, will need to be financially responsible to students and taxpayers.

Toward that end, the Department of Education has released a final set of proposed rules and definitions that addresses 13 of the 14 issues that have been under debate for the past year. The 14th issue - the highly controversial question of measuring and disclosing rates of 'gainful employment' for graduates of proprietary institutions - has been set aside while the government continues to hash things out with the industry.

Student Debt

Easing Student Debt

The issue at heart of the controversial 14th regulation is the high debt-to-income ratio suffered by many graduates of for-profit, or 'proprietary,' institutions. The outline in the current proposal sounds innocent enough: Proprietary and vocational institutions will be required to provide prospective students with eligible programs' graduation and job placement rates, and also provide the Department of Education with the information necessary to determine student debt and income levels after graduation. But the real teeth behind the regulation is the threat to cut off federal aid to programs whose graduates carry too high of a debt-to-income ratio. Specifically, the Department would bar aid to programs where a majority of students' loan payments in a 10-year repayment plan would exceed 8% of the lowest quarter of graduates' expected earnings.

For-profit colleges have spent months lobbying intensely for an alternative that looks more like what was released in today's 'Notice of Proposed Rulemaking' (NPRM). Lobbying organizations have suggested that proprietary institutions should simply provide more information about graduates' earnings and debt levels to prospective students. This would allow students to make informed decisions on the issue of gainful employment without revoking federal aid eligibility for any institutions. Of course, the fundamental problem with this proposal is that students often fail to avail themselves of this sort of information, or simply don't understand it when it's presented to them. Without any penalty attached to excessive debt-to-income ratios, it's hard to imagine that the situation will change.

Although the DOE has delayed the release of the official new rule governing this issue, Education Department officials have assured the public that they still plan to hold for-profit institutions accountable for preparing students for 'gainful employment.' But, as Education Secretary Arne Duncan notes, 'some key issues around gainful employment are complicated, and we want to get it right, so we will be coming back with that shortly.'

Part of what's complicating the issue is the assertion by many proprietary institutions that the proposed regulations would simply force them to close. This could harm the growing population of low-income and adult students who are served by these institutions. As The Chronicle of Higher Education reports, while for-profit institutions only enroll about 7% of America's 19 million colleges students, they serve roughly one-quarter of all adult undergraduates. And a new study by consulting company Eduventures projects that they'll have 42% of the adult undergraduate market by 2019.

The company credits flexible scheduling and innovative uses of online education for the growth - proprietary institutions are simply better at accommodating the needs of adult students. Serving this population is critical for America's economic recovery and long term economic health because postsecondary training is so crucial to getting people on a productive career track. Furthermore, these institutions have been taking a lot of the overflow as not-for-profit colleges and universities find themselves unable to handle the growing number of prospective students. If for-profit colleges were to close in large numbers, America's higher education system may soon have a crisis on its hands.

Receiving Federal Aid

The New Rules

Although the 'gainful employment' issue has been pushed back, the current proposal still covers several important issues, including student eligibility, recruiting practices and the appropriate institutional use of aid. Many students will be glad to learn that the DOE is even planning to speed up the disbursement of aid funds - no more waiting until mid-quarter to buy your books!

Student Eligibility

The NPRM notes that students, in general, 'are eligible for aid only if they have a high school diploma or pass an 'ability to benefit' test, and only if their academic standing is satisfactory.' The DOE goes on to offer several clarifications:

High School Diploma: In order to fight high school 'diploma mills,' the DOE will require institutions to implement procedures to evaluate the validity of a prospective student's high school diploma.

College Credits: However, students who successfully complete six credits of college-level work can then become eligible for federal student aid even if they don't have a high school diploma. This regulation was also included in the Higher Education Opportunity Act of 2008.

Ability to Benefit: The DOE can also determine whether a student has the ability to benefit from federal aid through testing, but the Department must approve test materials and procedures. This rule is an attempt to follow-up on recommendations by the Government Accountability Office (GAO) to improve the Department's oversight of testing programs.

Satisfactory Academic Progress: All postsecondary institutions must have policies in place that not only measure satisfactory academic progress, but prevent students from receiving federal funds if they have not met standards of academic progress. The new rules require a 'structured and consistent' method of student evaluation, but still allow individual institutions to establish their own specific policies.

Verification: As the law currently stands, students must re-file their Federal Application for Student Aid (FAFSA) every year to confirm their eligibility for financial aid. The new rules, coupled with a new data retrieval process at the IRS, would reduce the amount of information students have to provide annually to their schools.

Backdoor Recruitment


The second class of proposed regulations deals with protecting consumers - aka students - from 'misleading or overly aggressive recruiting practices,' as well as clarifying the role of state government in overseeing federal aid distribution.

Misrepresentation: During public hearings on higher education, the Department heard complaints from a number of students who felt deliberately misled by student recruiting practices. Students reported falsifications on program offerings, payment options and job prospects after graduation. As a measure of consumer protection, the new regulations would strengthen the Department's ability to punish institutions that engage in 'deceptive advertising, marketing and sales practices.'

Incentive Compensation: The Department also reports hearing about aggressive recruiting practices leading students into programs for which they aren't qualified, or to take out loans that they can't afford. In order to reduce these practices, the DOE is seeking to strengthen regulations that prohibit schools from compensating recruitment officers based on securing student enrollment. The proposed rule would eliminate 'safe harbor' provisions that many schools have used to violate the spirit of the law.

State Authorization: The Higher Education Act requires state authorization for institutions to participate in federal funding programs. Because some states have failed to establish methods for approve and monitoring postsecondary programs, the proposed regulations clarify this 'important state responsibility.'


Institutional Eligibility

The final class of proposed regulations covers what types of postsecondary courses are eligible for federal funds, and how to determine the appropriate amount of aid.

Credit Hour: The Department currently uses credit hours to determine eligibility for federal funding, but has no standard definition for a 'credit hour.' The new rule will define a credit hour and establish a method for determining whether an institution has appropriately assigned credit hours. The DOE does acknowledge that learning outcomes, not seat time, should guide this definition.

Written Agreements: Some institutions use written agreements to define an instructional sharing arrangement. Noting that problems have arisen due to shared parent entities or failure to meet participation requirements, the DOE is proposing regulations that will limit the amount of a program that can be provided by a separate school and prohibit arrangements with schools that have had their Federal student aid participation revoked.

Retaking Courses: Currently, students who retake coursework cannot have those credit hours count toward the calculation of a full-time course load. The proposed definitions would relax this rule, allowing such courses to count toward full-time if the student's program registers by the semester or term.

Determining When a Student Has Withdrawn: A number of loopholes exist in current regulations that complicate the process of determining how much aid a student must pay back if he or she drops out of a program. The new rule will eliminate the loopholes and more clearly define when a student is considered to have withdrawn. It will also address when a school must take attendance in order to calculate the return of federal funds.

Disbursing Federal Student Aid Funds: Current students often fail to receive Federal funds before their courses start. To correct this problem, the new regulations will ensure that the neediest students are able to purchase books and supplies by the seventh day of their pay period.

The Department expects to release a final draft of these regulations for public comment this Friday.

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