An 'F' for college loan guidelines

  • Article by: JIM SPENCER , Star Tribune
  • Updated: July 2, 2012 - 9:12 PM

Federal judge said U.S. standards for students' repayment rate on loans for education at for-profit schools "arbitrary and capricious."

WASHINGTON - Four days after the U.S. Education Department reported that for-profit college students struggle to pay back taxpayer-guaranteed education loans, a federal judge gave the standard used to measure those difficulties a failing grade.

U.S. District Judge Rudolph Contreras in Washington ruled that the government's minimal loan repayment standard of at least 35 percent was "arbitrary and capricious." The decision was in response to a lawsuit filed by a national trade association of for-profit colleges, whose membership includes 47 schools operating in Minnesota. It bitterly opposed a so-called "gainful employment" test.

The three-pronged test is supposed to make sure for-profit college students get jobs with wages sufficient to repay their education debt. Otherwise, the government is threatening to withhold federal education loans from for-profit colleges. At stake are billions of dollars a year in government money, which accounts for the vast majority of income to the private companies that run for-profit colleges.

In his ruling issued Saturday, Contreras upheld two elements of the gainful employment test that measured loan payments in relation to total and discretionary income. Individuals are not supposed to pay more than 12 percent of overall earnings nor more than 30 percent of discretionary income in student loan payments. However, because both loan-to-income ratios were connected with the suspect repayment test, the judge felt he had to reject everything.

The loan standard came about because for-profit colleges generally charge more than public colleges and have significantly higher student loan default rates than public or non-profit colleges. That means taxpayers are on the hook to private companies to pay for student loan defaults.

The Association of Private Sector Colleges and Universities (APSCU), which filed the lawsuit, claimed victory over a standard that it says unfairly singled out for-profit colleges. The only acceptable alternative, said APSCU President Steve Gunderson, is "a single definition for all higher education."

"The bottom line is the [gainful employment test] was vacated," he explained. "If something is going to happen, they're going to have to start over."

The Education Department has not decided whether to appeal Contreras' decision.

"The court clearly upheld the authority to regulate college career programs, but found that the department had not provided enough explanation of its debt repayment measure," said Peter Cunningham, assistant secretary of education for communication and outreach. "We are reviewing our legal and policy options to move forward in a way that best protects students and taxpayers."

Woodbury-based Globe University, a for-profit school with 28 campuses and 1,500 online students, was a party to the lawsuit through its membership with the APSCU. Jeanne Herrmann, Globe's chief operating officer, called the judge's ruling "a positive sign."

"It validates the concerns we had," Herrmann said.

The proper way to measure success, she added, is not to measure "entry level salary," but to make sure students get jobs in the fields for which they train.

Capella University, a publicly traded online school with 37,500 students, and Walden University, a privately held online school with 48,500 students, are among Minnesota's largest for-profit colleges. Both are based in Minneapolis. Neither belongs to APSCU.

Capella is "reviewing the ruling" to see what affect it might have, said Mike Buttry, Capella's vice president for corporate communications.

In a statement, Walden University said, "the metrics as they existed and the court decision do not affect our longstanding effort and mission to focus on our students' success."

Among the schools most relieved by the ruling was Corinthian Colleges Inc. Shares in publicly traded Corinthian slumped last week after the Education Department said 45 of the 652 Corinthian programs it surveyed failed the three-pronged test.

On Monday, Kent Jenkins Jr., Corinthian's vice president for public affairs communications, said the court decision marked "a victory for our students and for common sense."

"We believe that all of higher education must be accountable to students and the public," Jenkins said. "But gainful employment measures the wrong things the wrong way. We hope the Department of Education will now look for a fair, realistic and practical approach to measuring the value of all post-secondary education."

Jim Spencer • 202-383-6123

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