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Commentary By Preston Cooper

Administration's Student Assistance Regulations Are a Recipe for Corruption

Education, Economics Higher Ed, Regulatory Policy

Politico recently released a 3,000-word investigative article detailing the planned takeover of Apollo Education Group, the company which owns the University of Phoenix for-profit college chain. Pending approval by the U.S. Department of Education and accreditors, Apollo will undergo an acquisition by Vistria Group, for which the COO, Tony Miller, is President Obama’s former second-in-command at the Education Department. This, as authors Michael Stratford and Kimberly Hefling write, “raises questions.”

Unfortunately, President Obama’s recently released student assistance regulations will make it easier for government bureaucrats to drive companies out of business and buy up the remains.

As Deputy Education Secretary from 2009 to 2013, Tony Miller oversaw the writing and implementation of regulations which explicitly targeted for-profit colleges such as the University of Phoenix. When President Obama was inaugurated in 2009, Apollo Education Group’s stock traded at around $87 per share. It has since fallen by nearly 90%, to just $9 in the past week.

Now, Miller’s company is set to acquire Apollo for a bargain. He is not the only Vistria official with connections to the Obama Administration—the group’s co-founder and co-CEO is Marty Nesbitt, a longtime friend of the president. Politico reports:

What stands out about the proposed deal is that several key players are either close to top administration officials, including the president himself, or are former administration insiders — especially Miller, who was part of the effort to more tightly regulate for-profit colleges at the very agency now charged with approving the ownership change. […]
“There is at least a taste of unseemliness involved in this,” said Mark Schneider, a former top education official under President George W. Bush. “They regulate it. They drive the price down. …They are buying it for pennies on the dollar.”

Apollo Education and the University of Phoenix may have deserved to collapse, and might have gone down even without tighter regulation. The institution has been subject to fines and enforcement actions that long predate the Obama Administration. It is subject to investigations by state attorneys general of both parties. Without the cash cow of federal student aid, perhaps the school would have never reached the heights it did.

But the affair underscores how regulation can serve purposes other than the public interest, when the regulators or their allies have a stake in one outcome or the other. And the susceptibility of regulators to such bad incentives is about to get much worse.

Earlier in June, the Obama administration unveiled a new proposed rule which would cut a for-profit or non-profit college off from federal aid programs when a federal or state oversight entity, such as a state attorney general or a federal regulator, sues the institution for a substantial amount. (Public institutions are exempt.) The oversight entity does not have to prove anything in court—the suit itself will trigger loss of federal funds unless the college puts up, within 30 days, letters of credit equal to 10% or more of its student loan revenues.

Many colleges, particularly for-profits which do not have large endowments or government grant money to cushion the loss of student loan funds, will collapse if a state attorney general or federal regulator files a lawsuit. Independent verification of whether the suit’s claims are compelling might not happen until it is already too late for the college. The whims of individual politicians and regulators, each of whom face their own set of incentives that might not align with the public interest, could determine whether a private college survives or collapses.

If the University of Phoenix affair raises eyebrows, imagine the opportunity for questionable conduct under the new regulations. Any attorney general could unilaterally drive a private college to the brink of bankruptcy, thus allowing a political ally to buy it up at a fire-sale price. These regulations could spawn a dozen Tony Millers. Moreover, the colleges they take down could be much less deserving of their fate than the University of Phoenix.

It is perfectly reasonable—and desirable—to place standards on receipt of federal money. However, those standards should be clear and objective, not based on the subjective decisions of individuals. That is because individuals are imperfect and always will be. The temptation to use over-broad regulatory authority for personal gain will inevitably win over some of those in power.Colleges, and the students who attend them, will suffer accordingly.

This piece originally appeared on Forbes

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Preston Cooper is a policy analyst at the Manhattan Institute's Economics21. Follow him on Twitter here.

This piece originally appeared in Forbes