The era of students taking out bigger loans than they can ever repay may be drawing to a close at US for-profit colleges.
For a significant portion of Barack Obama’s presidency, his administration has been trying to curtail the power of for-profit colleges, a number of which allegedly use unethical recruitment tactics to sign up vulnerable students who take out massive federal loans.
Today, Obama’s gainful employment rule takes effect. It requires career training programs, many of which are at for-profit institutions, to prove that students will be able to handle the debt, before granting federal financial aid that the schools rely on.
The schools must demonstrate that students in a specific career track will make enough money upon graduating to cover the cost of their loans. Annual student loan payments cannot surpass 8% of a typical student’s total future earnings, or 20% of their discretionary income, which take cost-of-living expenses into account. If the programs don’t meet those criteria, they could lose the federal aid dollars.
Default rates at for-profit colleges are much higher than at nonprofits; almost one in five for-profit students defaults on their loans within three years.
The administration has tried to institute gainful employment rules like this one before, but they were struck down in court. The new rules were announced in October and upheld last week. The department of education has been putting intense pressure on for-profit schools, especially after former giant Corinthian Colleges closed its doors in the face of a $30 million fine for misleading students about job placement. In recent months a number of other for-profits have also announced they are closing campuses.