The Obama Administration has unveiled a new sweeping proposed regulation designed to crack down on fraudulent colleges and universities. The rule, which clocks in at 530 pages, would also create a number of new “triggering events” that could sever colleges’ access to federal student aid.
“A less-discussed provision of the proposed regulation would introduce more grounds for cutting a college off from student aid funding.”
The proposed rule’s stated purpose is to “promote compliance” by schools to benefit borrowers. If the rule truly did strengthen college accountability, it would be a positive development. But the regulation instead creates a piecemeal and arbitrary system to catch bad colleges—faux accountability, not true accountability.
News reports have mostly focused on the main provision, which would cancel students’ federal loan obligations if their colleges commit fraud or make a misrepresentation. However, a less-discussed provision of the proposed regulation would introduce more grounds for cutting a college off from student aid funding. As I have written, the current gatekeepers of aid money—accreditors—have not been doing their jobs, and additional accountability measures from the Department of Education may be necessary. But the new “triggers” that would cut colleges off from taxpayer funding would do nothing to promote real accountability.
One of these “triggers” is a lawsuit against a college for substantial damages by any state or federal oversight entity, such as a state attorney general or federal regulatory agency. Under such a suit, a college will instantly lose access to federal funding unless it puts up a letter of credit equivalent to 10% of the student loan funds the institution received in the previous year. Under this standard, an attorney general could hold a college hostage, possibly for years, without having to prove anything. One can easily imagine a state attorney general in a tough reelection race trying to galvanize support by cracking down on unpopular for-profit colleges—and potentially putting several out of business without just cause.
Additionally, in order to maintain access to federal funding, a college must put up a letter of credit for each “trigger” it violates. Thus, if ten state attorneys general sue a single college—certainly possible with the rise of online education, under which students may study all over the country—the institution would have to put up credit equivalent to all the student loans it received in the previous year. Many colleges, particularly online schools without extensive physical assets to collateralize the letters of credit, would not survive.
“One can easily imagine a state attorney general in a tough reelection race trying to galvanize support by cracking down on unpopular for-profit colleges... putting several out of business without just cause.”
These regulations might be more justifiable if the oversight entities had to win their lawsuit before subjecting colleges to sanctions. At that point, the wrongdoing of the college in question would have been proven in a court of law. But under the new rules, attorneys general and regulatory agencies do not have to prove anything before accused colleges face financial repercussions. Many colleges will be shut down for political reasons, not substantive ones.
We all want colleges to do better. But these regulations send the message that colleges should focus more on keeping their local state attorney general happy rather than improving student outcomes. A quality college on the wrong side of politics might collapse before an inferior institution with the right political connections.
Other “triggering events” include a requirement that there be no “significant fluctuation” in a college’s receipt of federal student aid from year to year. Of course, “significant fluctuation” is left undefined, opening the door to arbitrary enforcement. Moreover, such a rule may discourage new schools from quick expansion, further cementing the status of mediocre established actors in higher education. Had Corinthian Colleges survived, it would have loved a rule like this.
There are around a dozen of these “triggers” in the new regulation. All require a letter of credit within thirty days, or else the school will lose its aid funds. This is no way to hold schools accountable to students and taxpayers—just more bureaucratic complexity and an opportunity for state and federal entities to look tough on private colleges. (Predictably, public colleges are exempt from these triggers.)
This is not a case of limited government versus big government. It is the Department of Education’s right, and duty, to place conditions on receipt of federal money, and to withdraw funding when it sees fit. That right is not at issue here. Rather, this is a case of good policy versus silly policy. If the Department’s goal is to change college behavior to benefit students, these regulations will undoubtedly fail to do so.
Limiting the government’s involvement in the student loan market would be the optimal solution. But if we must maintain our bloated current system of federal student aid, better accountability measures from the Department of Education might be in order. This new regulation does not fit the bill.
This piece originally appeared on Forbes
______________________
Preston Cooper is a policy analyst at the Manhattan Institute's Economics21. Follow him on Twitter here.
This piece originally appeared in Forbes