For-profit colleges won an incomplete victory last week when the Federal District Court struck down an onerous federal regulation that directly targeted them. In July 2011 Department of Education had required for-profits to secure "gainful employment" for their graduates if they wished to continue receiving federal aid; thus, they needed to demonstrate that 35% or more of their graduates were repaying their loans and that graduates' annual loan repayments did not exceed 30% of discretionary income or 12% of total earnings. Consistent with the Obama administration's general attack on for-profits, the DOE justified this mandate by asserting that "for-profit programs are most likely to leave their students with unaffordable debts and poor employment prospects."
Fortunately, the Court found that the debt repayment measures were "arbitrary and capricious" and thus could not stand. Indeed, the DOE seemingly conjured up those figures without any rational basis; as the Court argued, "The debt repayment standard...was not based upon any facts at all. No expert study or industry standard suggested that the rate selected by the Department would appropriately measure whether a particular program adequately prepared its students."
This wasn't a decisive victory, however, because the Court found that notion of a debt repayment standard was acceptable, thus setting the stage for future attempts by the DOE's lawyers to concoct figures that sound less arbitrary .
Moreover, this case underscores the government's baleful influence within the entire higher-education industry and the no-win situation it creates for for-profit colleges in particular. For-profits, like their non-profit brethren, are highly dependent on federally-backed student loans. As such, they're vulnerable to extensive federal tinkering. Indeed, they face an serious dilemma: they can refuse to accept federally-backed loans and lose out to the non-profits that do, or take these loans and accept both continued regulation and the implicit threat that disobeying these regulations will result in their closure. Given for-profits' reliance on federal support, we should anticipate more of the latter scenario. However, we should not expect their independence to last much longer.