Mortgaging Human Capital: Federally-Funded Subprime Higher Education
47 Pages Posted: 14 Dec 2011 Last revised: 17 Apr 2012
Date Written: April 16, 2012
The for-profit higher education sector, primarily funded by federal student aid dollars, produces both the highest debts and defaults and lowest completion rates for its students. In response, the U.S. Department of Education has promulgated the Gainful Employment Rule to require for-profit colleges and universities to meet either repayment or debt-to-income benchmarks to remain eligible to receive federal Higher Education Act funding. This article describes the business model of the career colleges and their rapid growth over the last decade, the history of proprietary school regulation, the limited remedies for overindebtedness of former students, and the tests imposed by the DOE rule. Although weakened after a massive lobbying effort, the Gainful Employment Rule as promulgated still promises to put some of the worst performing for-profit programs out of the business of operating on a federal dole. The article compares the bubbles in for-profit higher education and sub-prime mortgages, both of which involved federal encouragement of high risk-taking to achieve the American Dream. It concludes by questioning the federal policy of relying on for-profit schools to meet national higher education goals.
Keywords: for-profit higher education, Gainful Employment Rule, student loans, nondischargeability of student loans, for-profit colleges
JEL Classification: K2, K12
Suggested Citation: Suggested Citation