2017 Proprietary Higher Education Review: “It Will Never be ‘The Way We Were’”

By Tony Guida, Partner, Education Group of Duane Morris LLP

Can it be that it was all so simple then?
Or has time re-written every line?
If we had the chance to do it all again
Tell me, would we? Could we?
– From the theme song to the movie “The Way We Were”

The election of Donald Trump brought hope to many that Obama-era laws, regulations and policies aimed squarely at the proprietary higher education sector would be rolled back. Some even dared to dream of a return to the way we were, when “for-profit” was just another mode of delivery in a robust and diverse American higher education landscape.

While there has been a significant delay of all or part of many Obama-era regulations targeting proprietary schools, such as borrower defense to repayment and gainful employment, it has become clear that things may never return to our misty water-colored memories of the way we were.

Signals out of both the Trump administration and the Republican-led Congress point to a future for higher education that, despite some early regulatory relief, will be markedly different from the past. On a positive note, the proprietary sector is no longer in the bullseye of Democrats in power.

In a turnabout, the danger is that the sector could become the “collateral damage” in a Republican quest to dramatically re-shape the relationship between the federal government and traditional higher education.

In fact, if the GOP has its way, the days of generous access for students to federal financial aid without transparency or accountability regarding outcomes may be coming to an end for all sectors of higher education, public, private non-profit, and proprietary. The policy trajectory of those in power in Washington to reduce federal involvement in higher education could mean not just reduced regulatory burden, cheered by many, but also less federal funding support for higher education across the board whether through less student aid funding, less tax benefits supporting higher education, or other reforms.

Overview

A July 2017 CER article by my colleagues in our firm’s Washington, D.C. office describes in some detail the developments from the Trump administration and the more than 100 higher education related bills introduced by the 115th Congress through the midpoint of 2017. I won’t repeat those developments here and encourage you to review that article for context.

Unlike my CER year-end review articles for 2015 and 2016, this year I don’t have a long list to report of school closures or large-scale regulatory enforcement actions brought by the U.S. Department of Education (Department) or the alphabet soup of other federal and state agencies (CFPB, FTC, SEC, etc.) that banded together over the past few years to attack the proprietary sector. Secretary of Education Betsy DeVos has made it clear that she wants to decrease the federal government’s role in education, including by simplifying regulation, removing stale regulations from the books, and significantly scaling back civil rights investigations and enforcement actions at colleges and universities. While “de-regulation” sounds fine and good, the sector should anticipate and be prepared to respond to initiatives emanating from the White House and Congress with respect to higher education reform that could force fundamental changes to the delivery of higher education in this country for many years to come.

The Department’s first year: Restructuring, resetting and renegotiating

New organizational and enforcement approaches

As I reported last year, in February 2016 the Department announced the formation of a new Student Aid Enforcement Unit as part of the Obama administration’s self-proclaimed “aggressive actions to protect students and taxpayers.” This enforcement unit was designed to respond quickly by collaborating with other state and federal agencies “in building cases against” institutions alleged to have acted illegally. The enforcement unit was deployed almost exclusively against the proprietary sector and led to a significant increase in the number of enforcement actions and school closures in 2016.

This past May, Jim Runcie, the COO of the Department’s Federal Student Aid (FSA) office, abruptly resigned and was replaced by A. Wayne Johnson, a financial services executive with a background in the private student loan industry. Secretary DeVos took advantage of this change in leadership and announced a new more comprehensive approach to how FSA would enforce compliance by institutions participating in Title IV programs. In addition to taking a proactive risk management approach to identifying and mitigating risks before they pose a threat, the Department also instituted a comprehensive communications and executive outreach effort to ensure that institutions and their leadership understand their responsibilities, the consequences of non-compliance, and appropriate remedies. This corporate-style risk management approach to compliance is a marked changed from the prior administration’s very aggressive and very public approach to enforcement, especially against the proprietary sector.

The Department identified several new FSA executives who, under Wayne Johnson’s leadership, will lead its enforcement effort: Dr. Michael Dean, FSA’s chief enterprise risk officer; Dr. Charles Patterson, FSA’s senior advisor for executive-level compliance and enforcement outreach; Dr. Julian Schomke, Jr., who leads FSA’s Enforcement Unit; and Chris Greene, who is returning to FSA to head communications, outreach and customer experience teams.

The Department also discontinued several initiatives that were created during the Obama administration for the express purpose of “cracking down” on alleged abuses by for-profit colleges. The interagency task force launched to coordinate oversight of the sector between the Department and other governmental agencies – predominantly Democrat state attorneys general – appears to be either no longer active or no longer operating in a manner targeting proprietary institutions. And in September, the Department notified the Consumer Financial Protection Bureau (CFPB) that it was terminating their two memoranda of understanding regarding the sharing of information in connection with oversight of federal student loans. In explaining the termination, the Department pointed to the CFPB’s overreach “into areas that Congress never envisioned” that had “undermined” the Department’s mission to serve students and borrowers.

Finally, and consistent with President Trump’s desire to streamline federal agencies, as of October 2017, Secretary DeVos had reduced the Department’s workforce by about 350 employees including political appointees.

With a report of buyouts offered to 255 employees, that number is sure to grow, and mirrors buyout efforts at other federal agencies that will change the shape of those agencies for decades to come. At the same time, the Trump administration has been slow in filling several important political positions. As of early December, when this article was submitted, the Administration had only nominated nine of the 15 Department positions that require Senate approval. Only two have been confirmed. Many of these positions are currently being filled with “acting” appointees. While the Department’s headcount cutbacks are beneficial to the federal treasury, they have resulted in delays in response times and actions taken by the Department.

Regulatory roll back

Perhaps the biggest early benefit to the proprietary sector from President Trump’s election is that the DeVos-led Department has made good on President Trump’s campaign promise to “roll back” Obama-era regulations. In February, President Trump signed Executive Order 13777, entitled “Enforcing the Regulatory Reform Agenda,” which established a Federal policy “to alleviate unnecessary regulatory burdens” on the American people. Almost immediately the Department set up a task force to oversee the implementation of its regulatory reform initiatives. In June, the Department published a request for comments concerning education regulations that may be appropriate for appeal, replacement or modification. As of the extended close date for comments in September, 16,396 comments had been received. We expect the Department to continue to utilize this information to shape its policy formulations with regard to regulatory reduction in higher education.

In June, the formation of two negotiated rulemaking committees to develop proposed regulations to revise the Obama-era gainful employment (GE) and borrower defense to repayment (BDR) rules were announced. Also in June, the Department delayed the effective date of the BDR regulations in response to a pending challenge under the Administrative Procedures Act brought by the California Association of Private Postsecondary Schools (CAPPS) in a D.C. federal court. The Department also suspended major provisions of the GE disclosure requirements and extended the deadline for all GE programs to file alternative earnings appeals. It did so in light of the D.C. court’s decision in American Association of Cosmetology Schools v. DeVos, which held that the 50 percent response rate requirement for earnings appeals under the GE rule was arbitrary and capricious. Nearly 20 state attorneys general have filed suits in federal court to challenge the Department’s delays in enforcing the BDR and GE rules. The negotiated rulemaking sessions for BDR and GE began in November and December, respectively.

The Department also made significant changes in Title IX policy through its Office for Civil Rights (OCR). This includes narrowing its investigations to allegations raised in the complaint and away from systemic reviews of Title IX implementation as part of Title IX investigations, implementing a public comment process to change Title IX procedures for sexual misconduct on college campuses, and announcing interim Title IX guidance that withdrew two Obama-era Dear Colleague Letters.

The Department’s regulatory agenda has drawn strong opposition from a number of Senate Democrats and state attorneys general, particularly with respect to regulations involving the proprietary sector and Title IX.

Other noteworthy Department actions

The Department reinstituted year-round Pell Grants beginning with the 2017-18 award year that began on July 1, 2017. Congress had included a restoration of this benefit in an omnibus funding bill that was passed and signed into law earlier in the year.

The Department also approved two large transactions involving combinations of for-profit and non-profit institutions in the face of considerable public opposition. The first was the sale by Education Management Corporation (EDMC) of 62 South University, Argosy University and Art Institute campuses to the Dream Center Foundation, a 501(c)(3) tax exempt non-profit with no prior affiliation with EDMC. The second was Purdue University’s plan to acquire Kaplan University and operate it as a separate public institution. The EDMC transaction was a traditional asset sale structure while the Purdue/Kaplan deal is more like an Online Program Management (OPM) company arrangement, with Kaplan providing support services to Purdue’s new institution after closing.

The Department’s approval of both of these transactions is a signal to the market that the Trump administration would approve transactions where the deal structure, finances and buyer capability are such to ensure that students, institutions and the Department’s interest have adequate protections.

Finally, the Department did not come to the rescue of the Accrediting Council for Independent Colleges and Schools (ACICS), whose federal recognition was terminated by the Obama administration. ACICS has a suit pending in a D.C. federal court challenging the termination. As a parallel strategy, ACICS in October submitted to the Department a formal initial petition for recognition. ACICS’s petition would need to be considered by the National Advisory Committee on Institutional Quality and Integrity (NACIQI) and, whether rejected or accepted, approved by the Department prior to June 12, 2018, when all remaining ACICS accredited schools would lose Title IV eligibility if alternative accreditation is not in place.

Less federal involvement, but less funding?

While the Department has been aggressively unwinding many of the higher education regulations implemented by the Obama administration, it is Congress that will likely have the most significant and long-term impact on higher education. Reauthorization of the Higher Education Act of 1965 (HEA) is certainly the prime vehicle for the GOP-led Congress to implement its higher education reform agenda. However, we also began to see real changes to higher education policy in spending decisions and tax proposals that have been making their way through Congress during 2017.

The House introduces its HEA reauthorization bill

The Chairs of the House Education & Workforce Committee (HEWC) and Senate Health, Education, Labor and Pensions (HELP) Committee have indicated that HEA reauthorization is a top priority for the 115th Congress and their priorities with respect to higher education reauthorization are relatively aligned at the 10,000-foot level.

Leadership is concerned with high student debt and the cost of education, expanding access by simplifying student financial aid, reducing unnecessary regulation, promoting transparency through increased consumer information, supporting innovation in accreditation, and increasing institutional accountability for student outcomes.

As often is the case, however, how they achieve those priorities requires the hard work of evaluating alternative legislative proposals and reaching consensus on approaches that can satisfy not only Republican leadership, but enough Senate Democrats to reach the finish line. And as healthcare reform has demonstrated, partisan politics and intra-party disagreements make passing legislation difficult, even in those instances such as reconciliation when only a bare majority is required for passage.

Early this December the House, led by HEWC Chairwoman Virginia Foxx (R-NC), introduced its 542 page HEA reauthorization bill entitled Promoting Real Opportunity, Success, and Prosperity through Education Reform (PROSPER) Act. The summary released with the bill outlines its four themes: 1) promoting innovation, access and completion; 2) simplifying and improving student aid; 3) empowering students and families to make informed decisions; and 4) ensuring strong accountability and a limited federal role.

The regulatory relief afforded by the Prosper Act is significant. It would repeal the definition of the term “credit hour,” as well as the state authorization, GE, BDR and 90/10 rules. It also expressly precludes the Department from enacting regulations with respect to credit hour definition, state authorization and the GE rule and from enacting a postsecondary education rating system. To level the playing field so to speak, the Act would include proprietary schools in a single definition of “institution of higher education.”

From a funding perspective, the Act would streamline student aid programs into one grant program, one loan program, and one work-study program. The new Federal ONE Loan Program is an unsubsidized loan program with three categories of borrower: undergraduates, parents and graduates, with caps for the first time placed on Parent PLUS and Graduate PLUS loans. The Act would also permit colleges to limit borrowings under certain circumstances. Repayment options would also be simplified to one standard 10-year repayment plan and one income-based repayment (IBR) plan (ending the public service loan forgiveness program). These changes could leave many students with no alternative if the private loan market is not available to complete the funding of their education.

College accountability measures would also radically change. A program level repayment rate metric would replace the institutional-level cohort default rate (CDR) metric. Grant and loan aid to students would be disbursed on a weekly or monthly basis, described as “similar to a paycheck.” And to cause institutions to share in the risk of non-completion, the return to Title IV rules would be changed so that institutions would not fully earn aid until a student completes a term, with the institution responsible for returning all unearned aid.

Finally, and consistent with Trump administration principles, the Prosper Act expands opportunities for students to contribute to the labor market much more quickly through shorter-term programs, a shift away from reliance on traditional four-year degrees.

On the Senate side, HELP Committee Chairman Lamar Alexander (R-TN) has indicated he would like to pursue ideas in which there is a bipartisan agreement, which would be necessary to reach the 60-vote cloture threshold (barring a Republican end to the filibuster or use of budget reconciliation). This may result in a more fragmented, as opposed to comprehensive, approach to reauthorization of the HEA by the Senate. And while Senate Republicans may agree with many of the policies contained in the House HEA bill, getting any Democratic support for its many regulatory rollbacks and cuts in student aid funding may be near impossible.

Student financial aid program reform

While many issues subject to reauthorization are peculiar to the proprietary sector, how Congress addresses student debt is a matter that has a significant impact on all of higher education. As is seen in the Prosper Act, Congress looks to attack the student debt issue on several fronts, including reducing the amount of federal aid that is available to students through loans and through risk-sharing models that add institutions to an equation that currently only includes students and the federal government as direct stakeholders in whether or not students repay their loans.

The sunset of the Perkins Loan program should have been a bellwether for how Congress would approach federal student loan programs under HEA reauthorization.

While not used much by the proprietary sector, the Perkins program helps low-income students fill the gap between the cost of attendance and the amount of funding they receive through Pell Grants, direct loans and work-study. Perkins loans are made through campus-based revolving funds established from a combination of federal and institutional contributions (a form of risk-sharing, actually). With the loan program set to expire, Congress in 2015 extended the Perkins program for two years in the face of heavy lobbying by a coalition of traditional colleges and their trade associations. Proponents of the Perkins loan program thought the concept of additional gap funding for low-income students provided by the Perkins Loan program would be included in HEA reauthorization.

The HEWC’s Prosper Act, while it increases undergraduate loan limits, has no Perkins Loan substitute and also calls for caps on Parent PLUS and Graduate Plus loans, positions that have support on the Senate side as well. In particular, Parent PLUS loans have had a substantial impact on older Americans reaching retirement who borrowed for college or co-signed student loans on behalf of their children and are now faced with having a portion of their Social Security retirement or disability benefits garnished for nonpayment of federal student loans. The grim effect that outstanding Parent PLUS loans are having on many retiring parents has caused that program to become “toxic” on the Hill, as one Senator recently related. And neither of the PLUS programs has the transparency or accountability that the Stafford Loan program historically has had.

A second area to watch is the concept of risk-sharing, also referred to as “skin-in-the-game.”

There is widespread agreement that institutions should be held accountable for student outcomes, including sharing in the risk of default or non-payment of federal loans.

The methods used to get there could have significant unintended consequences. The House Prosper Act seeks to impact completion by tying it to when an institution earns aid. Senate ideas for risk sharing were included in a HELP Committee issue paper on the topic: having colleges assume a liability based on some factor related to their former students’ repayment of federal loans (the example provided was 10 percent or 20 percent of total defaults); having colleges guarantee a percentage of the loan amount for current students (the example of 90 percent, 70 percent and 60 percent for a student’s first, second and third year and beyond, respectively, was provided); and establishing a Federal Student Aid Insurance Fund into which colleges would pay yearly premiums based on federal aid volume and other risk factors. Provisions such as those included in the HELP Committee issue paper, if not properly calibrated, could have devastating effects on many institutions whose profit margins (or, for nonprofits, change in net assets) or cash flow would not support it – factors which the HELP Committee’s issue paper did not consider.

As mentioned above, while bipartisan agreement on many of the GOP’s higher education initiatives is unlikely, it is not beyond the realm of possibility for a number of these policies to be included in legislative vehicles only requiring a majority vote, such as budget and spending bills.

Congressional priorities: “Show me where you spend your money”

“Don’t tell me where your priorities are. Show me where you spend your money and I’ll tell you what they are.” – James W. Frick.

Look for significant cuts in federal funding of higher education

The higher education fiscal priorities of the Administration, the House and the Senate announced during 2017 could foretell a path toward a net reduction in federal funding for higher education. While the House and the Senate will ultimately need to reconcile their differences in reaching 2018 budget and spending packages, it appears that a fair amount of higher education policy matters may take place in budget, spending and tax reform bills well before HEA reauthorization is completed.

The Trump administration’s 2018 budget proposal released in March asked for significant cuts to student aid programs and university-based research and would refashion many federal student loan programs. The President’s budget called for a 13.6 percent decrease from the Department’s current funding levels. Reductions included allowing the Perkins Loan program to expire, phasing out subsidized federal loans and public service forgiveness loans, eliminating the Supplemental Educational Opportunity Grant (SEOG) Program, halving the Federal Work-Study (FWS) program, and simplifying the multiple income-based repayment programs for student loans into a single program. The President’s budget, while in favor of reinstating year-round Pell Grants, also proposed taking nearly $4 billion from the Pell surplus.

In July, the House Appropriations Committee approved the FY 2018 Labor-HHS spending package that includes higher education. This bill would reduce the Department’s current budget by $2.4 billion down to $66 billion. The bill would maintain level funding for Career and Technical Education (CTE), Student Financial Assistance programs, Pell Grants, SEOG and FWS. The bill increases funding for TRIO and GEAR-UP programs, both of which are designed to support the success of low-income students pursuing higher education. Pell Grants would be level funded allowing for maximum awards of $5,920, but $3.3 billion of the Pell Grant surplus would be reallocated to other Committee priorities. While the bill restores funds over the President’s 2018 budget proposal, Democratic lawmakers voiced concerns about the elimination of the teacher prep program and the cuts to the Pell surplus.

In September, the Senate Appropriations Committee approved the FY 2018 spending bill for Labor, Health and Human Services, Education and related agencies.

Overall, the bill would provide $68.3 billion for the Department, which is essentially flat with its current budget.

The Senate bill would increase the maximum Pell Grant award from $5,920 to $6,020 and provide new funding of $2 billion for the National Institutes of Health (NIH). The Senate bill also includes a small increase for TRIO and provides level funding for SEOG and FWS.

Both bills are more than the Trump administration’s budget proposal that requested a $9.2 billion cut in overall higher education spending, down to $59 billion. As of early December, when this article was submitted, Congress was intensely focused on tax reform and making little progress with passing regular spending bills for FY 2018. It remains to be seen how these differences will be reconciled.

Tax reform: The so-called “war” on college

The House passed tax reform bill, dubbed by The Atlantic as part of the “Republican War on College,” proposes changes that are estimated to reduce higher education benefits by more than $60 billion over 10 years. On the chopping block potentially are some well know higher education tax breaks: deductions for interest paid on student loans and for college tuition paid; tax exemptions for tuition discounts that colleges give their employees, including graduate students; Section 529 College Savings Accounts; the $5,250 tax exemption for employee education assistance programs; and repeal and consolidation of the Hope Scholarship Tax Credit and Lifetime Learning Credit (LLC) into the American Opportunity Tax Credit (AOTC). The House-passed bill also has provisions that impact only traditional higher education, including creating a new excise tax of 1.4 percent on endowments at certain institutions, changes to the tax treatment of tax-exempt bond financing used by qualified 501(c)(3) institutions to build dorms, classrooms and other infrastructure, and a reduction in the value of charitable deductions due to nearly doubling the standard deduction.

The Senate passed its tax reform bill in early December. The Senate bill would preserve the student interest deduction, exemption for tuition waivers for college employees, $5,250 exemption, Hope Scholarship, LLC, and AOTC. It would also preserve certain tax-exempt funding instruments. The House and Senate tax bills remained subject to reconciliation when this article was submitted.

When trying to explain Congress’ underlying rationale for this unprecedented change in approach to taxing higher education costs and benefits, which primarily will impact traditional higher education, reference is made to a recent poll by the Pew Research Center that found that 58 percent of Republicans and Republican-leaning independents had a negative view of colleges and universities. This negative view of higher education and a projected increase to the deficit by at least $1 trillion under either tax reform bill may continue to negatively impact Congressional budgeting and spending policies, including program funding ultimately included in HEA reauthorization.

Pivoting towards the future

The current political environment with respect to higher education reform presents both threats and opportunities for the proprietary sector in the years to come. In the short-term, the sector will certainly benefit from the massive regulatory rollback that is underway. It also may benefit if traditional colleges become less competitive due to reforms that are underway.

Higher education funding may be a different story. For the vast majority of Americans, college affordability and excessive student debt are two sides of the same coin. And they apply to all sectors of higher education. And fair or not, policymakers hold colleges responsible for perceived crises in these areas and will look to include colleges as part of the solution. Current proposals such as conditioning an institution’s Title IV eligibility on outcomes, establishing risk-sharing arrangements with colleges, or other completion related initiatives will present significant new expense and cash flow issues that many institutions simply will not be able to weather.

The concept of college affordability also has another component that this Republican Congress is seeking to address that will impact revenues: college costs are rising too fast, and college is too expensive.

Despite honest and often sound explanations from college administrators as to why college is so expensive, most members of Congress believe that colleges can do more to reduce or discount tuition to enable lower-income students to attend. In fact, in many ways, the word innovation when used with respect to higher education reform is simply code for the need for colleges to deliver education faster, better, and cheaper.

To push colleges to reduced costs, this Congress will likely decrease the amount of available federal aid for higher education. Pell Grants seem safe for now, although shifting funding for the program to fully discretionary could set it up for drastic funding reductions long-term. Potential cuts to Parent and Graduate PLUS loans would negatively impact a number of proprietary schools that enroll non-traditional students or offer graduate programs. Other student aid cuts to Perkins and SEOG are more likely to impact only the traditional sector as they are more campus-based forms of aid directed primarily at more traditional students.

There is no question that funding mechanisms for higher education (both direct, and indirectly through tax incentives) will be changing over the next several years. As increasing numbers of colleges experience declining revenue due to declining enrollment along with increased costs, more school failures can be expected – especially among traditional colleges with fixed cost structures that allow little room to adjust or adapt. In the long run, those colleges that can do more for less, making college more affordable while delivering better outcomes, will be the winners.

It was never uncomplicated

Katie: “Wouldn’t it be lovely if we were old? We’d have survived all this. Everything would be easy and uncomplicated; the way it was when we were young.”
Hubbell: “Katie, it was never uncomplicated.”
Katie: “But it was lovely. Wasn’t it?”
Hubbell: “Yes, it was lovely.”
– Katie (Barbara Streisand) talking to Hubbell (Robert Redford) at the end of the movie “The Way We Were”

The Spellings Commission more than a decade ago raised significant issues facing higher education in the areas of access, cost and affordability, a complex and inefficient federal financial aid system, learning outcomes, transparency and accountability, and innovation. Having been on the operations side of the proprietary sector before President Obama was elected, I can tell you that while it may have been lovely back then, it was never uncomplicated.

TONY GUIDA is a Partner with the Education Group of Duane Morris LLP, a law firm with more than 750 lawyers in offices across the United States and internationally. Tony focuses his practice on issues relating to federal and state higher education law; accreditation; mergers, acquisitions and other substantive changes; government response and crisis management; federal and state higher education policy; and government affairs. Tony has previously served in senior executive positions with two major publicly traded companies that owned and operated colleges and universities on multiple platforms, where his responsibilities included regulatory affairs and compliance, acquisitions and divestitures, government and public affairs, policy, strategic planning, new campus development, and public relations. He has also served as CFO and general counsel for a small proprietary college. Prior to joining the higher education industry nearly 20 years ago, Tony was a partner in the litigation section of a large regional law firm.

Tony currently serves on the Board of Trustees of a private non-profit university and previously served on the Board of Directors of Career Education Colleges and Universities (CECU), a national trade association representing proprietary institutions. He has previously served on the Advisory Committee on Student Financial Assistance, which was created by Congress to serve as an independent source of advice and counsel to Congress and the Secretary of Education on student financial aid policy. Tony is a frequent speaker at symposia and conferences on higher education issues.

Tony is a 1986 graduate of the University of Cincinnati College of Law, where he was an Editor of the Law Review, and a magna cum laude graduate of the University of Dayton with a degree in Accounting.

Areas of Practice: Higher Education Transactions, Government Response and Crisis Management, Licensure and Accreditation, Federal and State Higher Education Law, Online Education, Federal and State Higher Education Policy and Government Affairs.